By Daniel Lanyon on 12th October 2016
The former chairman of the Financial Services Authority struck an optimistic note about how various forms of alternative could contribute to a healthier financial base but not without adding a few caveats.
The budding market for alternative credit market could be a boon to the health of the global economy, according to Lord Adair Turner, former chairman of the Financial Services Authority (FSA).
Turner ran the FSA from the height of the financial crisis in May 2008 to its closure in 2013. More recently, he attracted the ire of many in the budding world of alternative finance with comments back February that suggested more than a little scepticism from the part of financial regulators and City grandees such as himself on its long term health.
“The losses which will emerge from peer-to-peer lending over the next five to 10 years will make the bankers look like lending geniuses,” he told a journalist from the BBC.
In something of a volte face, however, Lord Turner is who is a senior fellow of George Soros’ Institute of New Economic Thinking, told an enraptured crowd yesterday at LendIt Europe that various forms of alternative finance that provide direct lending to firms and individuals could be beneficial to financial markets during period of stress,
“Direct lending is likely to become a stable, significant and useful part of our total credit supply system.”
He says there are several benefits to direct lending that could bring help to build a more stable financial system of credit.
“I am certain that many direct lending platforms, or indeed at the larger loan size level – private debt funds, will, along with challenger banks, play an increasing and profitable role within overall credit supply system."
“Since a system of direct lending will not be subject to the risk of funding runs, which is inherent in any system of bank maturity transformation and because the capacity of lending platforms to help funnel investor money from investors to borrowers is does not dependent on the adequacy of the equity cushion.”
Direct lending in the form of p2p or a fund is not anything new he says, but that the events of 2008 acted as catalyst for innovation in the sector. These include the growth of private debt funds which pool institutional investors and high net worth individuals’ cash and then directly lend to mid-market firms.
Also, “platform lenders” concentrating on the small business market which offer pooled portfolios small business loans of different combinations of risk and return as well as platform lenders performing the same function in the market for personal unsecured consumer loans.
“While p2p lending platforms are not deploying a radically new approach to credit analysis, they might in some cases be able to do it better than banks , and they can certainly in many cases do it at least as well while providing better customer service.”
“The idea that p2p lending is radically different rests on the assumption that it really is p2p lending – that individual investors are driving their own selection of individual loans or portfolio of loans, and that the Internet has made possible an information exchange rich enough to enable such decentralised credit analysis."
He says the current banking system presents a danger that when the economy turns down, and credit losses rise, those real economy effects can be magnified by a credit crunch – as seen in the financial crisis in which banks which incur losses which in turn constrains further lending.
“They do this in order to conserve and rebuild capital but the net result is a weaker economy. The banking system indeed has an inherent tendency to impart pro-cyclical impetus to both economic upswings and down springs, and while regulators have recognised this, and introduced counter cyclical capital offers to offset this effect, those buffers are still untested and may prove to be only partially effective.”
Direct lending, he says, could add a “spare tyre” to the credit supply system, making credit crunches less likely. However, he says regulators should monitor the evolution of the direct lending market.
“We have been here before – with optimistic stories before the 2008 crisis about how non-bank lending through credit securitisation was going to make the financial system safer, with the spare tyre of non-bank credit supply abolishing the credit cycle.”
“But in fact, this securitised form of non-bank lending, blew up spectacularly, producing first an over exuberant explosion of credit supply, and then a credit crunch quite as bad as any traditional banking system has ever managed to produce.”
Lord Turner’s comment back in February, he says, was somewhat taken out of context and subsequently misused in future articles as a deep scepticism of alternative finance.
“I didn’t intend to say anything about peer-to-peer lending, since the interview was actually about something completely different – and my comments were made when I assumed the interview was over – but the journalist asked one of those “oh by the way” type questions, and I answered not thinking that my reply would be of interest to anyone.”
AltFi is returning to Amsterdam for its second annual Summit in the city. The inaugural event last year was a roaring success, with key figures from across Continental Europe's alternative finance and digital banking sectors highlighted. These included Jeroen Broekema, managing director of Funding Circle Netherlands, and Mieke van Engelen, head of innovative partnerships at ABN AMRO's standalone lending platform, New10.