The answer is keep it simple, and keep it transparent.
The above statement came from Lord Adair Turner in a speech delivered at LendIt Europe this week. He was reflecting upon how peer to peer lending can avoid situations of systemic risk as exemplified by the not too distant past.
Lord Turner was caught making apparently unintended incendiary comments regarding the UK peer to peer lending industry in early 2016. His comments to the BBC were along the lines that forthcoming losses by P2P lenders would make the banking industry look like geniuses. Of course, an immediate assault of dissent percolated up from industry participants and advocates. Lord Turner, claiming his comments were not truly directed at P2P, shared a different story to the hundreds of LendIt attendees in London.
Lord Turner told the audience that “banks are a dangerous thing”. But banks are also economically useful. The leverage, mismatched maturities, and opaque structures create risk. Policy makers mandate capital and liquidity requirements to mitigate this intrinsic risk.
Securitization was, at one time, predicted to be the silver bullet to make the financial system safer for all. Lord Turner quoted a statement on securitization by the IMF in its Global Financial Stability Report;
“…the dispersal of credit risk by banks to a broader and more diverse group of investors… has helped to make the banking and overall financial system more resilient. The improved resilience” the IMF went on to suggest “may be seen in fewer bank failures and more consistent credit provision..”
That was in 2006 and we all know how that ended up.
Lord Turner is now a believer in direct non-bank lending;
“my judgement is that the direct lending industry will grow and play a useful role, alongside tightly regulated banks, in our overall credit supply system.”
“Direct lending will play an important role going forward,” says Lord Adair Turner. #LenditEurope
— Lending Works (@LendingWorks) October 11, 2016
Caveats aside, Lord Turner believes that online lending has the chance to avoid the complexity that drove much of the financial crisis. Yes, solid credit analysis must remain paramount and certain segments will require a more bespoke and less automated approach. But Lord Turner is now more proponent than detractor;
“A platform lender, or a challenger bank, totally focused on this customer segment, may be able to do credit writing underwriting at least as well as a major bank, while providing better and faster customer service.”
In Lord Turner’s opinion, online lending success can continue by keeping the transparency and simplicity exhibited by the peer to peer lending industry today. And that should be a good thing for both consumers and small business.
A video of Lord Adair Turner’s LendIt speech is available to view here (email required).
The speech is embedded below.
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