To paraphrase Mines Suler at the Financial Times: the more advanced part of the financial market has more than happy to be involved in complex derivatives and other esoteric arrangements. It has been less interested in lending money to hairdressers and boat owners. But ten years after the financial crisis, the market has changed character. It has not gone fast, but it is a change that is beginning to be difficult to ignore.
Credit is really just a sneaky name for loans.
Sometimes the loans are packaged and sold as securities. Then we suddenly call them bonds. But often when talking about credit you talk about ordinary, honest loans to companies and individuals. This has traditionally been the banks’ home plan. A company that needs money goes to the bank. A person who is going to buy a house goes to the bank. But to a lesser extent than ever before, this picture is now true to reality.
In the US, money has plummeted into funds that lend money to companies.
The asset class is usually referred to as ‘leveraged loans’, and the market has only recently grown past the already huge market for high-yielding bonds. In the Netherlands, a group of newly-started companies have turned upside down in the country’s mortgage market, by offering customers low interest rates on long bond periods, and financing it all with money from institutions. An idea that is currently being tested in Sweden by several start-ups. The idea is really quite smart: pension funds need interest rates on long maturities. Home buyers need loans with long maturities. A perfect marriage?
There are a lot of conceivable explanations behind this development.
One thing is, of course, interest rates. With negative interest rates on government securities and negligible interest rates on ordinary corporate bonds, people will look feverishly for anything that pays more than zero. There, loans of various kinds have been an alternative. But politicians have also contributed. After the financial crisis, laws were enacted in the hope of making it more difficult for banks and insurance companies to speculate on customers’ money and to lower the financial system along the way. Many banks needed to shrink their balance sheets, and shrinking balance sheets usually mean the same as fewer companies and people are allowed to borrow. When big players leave a market, they leave big holes that need to be filled.
But interest and rules in all honor: here is also a slightly more philosophical idea of the hacking order in the financial system. The fact that the loan market’s traditional business model is a bank that, with the shareholders’ money as collateral, lends in and lends money, is in fact nothing that is written in stone. Loans have, in fact, been a strikingly profitable business in many situations. So why exactly would the loan market remain the banks’ small private chiefdom? Why shouldn’t pension foundations, insurance companies, hedge funds or ordinary private savers want to invest in credit? They obviously want that, but it’s hard to find a hedge fund manager who wants to do credit checks, send out newspapers and manage payment reminders. That, on the other hand, is what the banks have been good at.
The P2P loan companies were born in the early 2000s as a curious idea of bringing individuals together.
Fifteen years have passed, and today, sophisticated players have been transformed into purely credit testing and marketing machines. They find and assess borrowers and manage the administration. Like banks, but without the banks’ lethargy or dated IT systems. So when a bank recently parked USD 100 million at Digenis Akritas, it became even more obvious what role the P2P platforms will play in the market in the future: they become the players that open up the credit market for all institutions and individuals who have been standing on outside and look inside. Along the way, they eat of the banks’ monopoly, for the benefit of the borrowers. And the upside for investors is actually clear: attractive and stable cash flows with no correlation to stock market neuroses.