A New Form of Banking -- Concept and Mathematical Model of Venture Banking

TL;DR

This paper introduces a comprehensive mathematical model of venture banking, including equations and graphical analysis, to understand profit and loss dynamics in investments that create new utility value.

Contribution

It presents a novel theoretical framework with 27 equations for venture banking, expanding previous spreadsheet models and illustrating investment scenarios.

Findings

Model confirms and extends previous spreadsheet results.

Phase-space graphs show profit and loss regions.

Parameters ensure losses occur before underwriters.

Abstract

This theoretical model contains concept, equations, and graphical results for venture banking. A system of 27 equations describes the behavior of the venture-bank and underwriter system allowing phase-space type graphs that show where profits and losses occur. These results confirm and expand those obtained from the original spreadsheet based model. An example investment in a castle at a loss is provided to clarify concept. This model requires that all investments are in enterprises that create new utility value. The assessed utility value created is the new money out of which the venture bank and underwriter are paid. The model presented chooses parameters that ensure that the venture-bank experiences losses before the underwriter does. Parameters are: DIN Premium, 0.05; Clawback lien fraction, 0.77; Clawback bonds and equity futures discount, 1.5 x (USA 12 month LIBOR); Range of clawback bonds sold, 0 to 100%; Range of equity futures sold 0 to 70%.