“The financial crisis has revealed fatal institutional and structural deficits at the finance market. Politics has reacted to the financial crisis with a sea of legal bills and regulations. But all regulating efforts are merely system-imminent reparation measures and do not solve the core problems. For this, a fundamental financial reform is needed. This article analyzes the finance system’s shortcomings, documents the reform approaches from the past three years, and designs a base structure for modern finance architecture without banks.”
Excerpted from Rainer Lenz:
“The institutional separation between investment banking and commercial banking and the prohibition of derivative trading out of purely speculative motives are reforms of the finance sector for a transition phase to new structures. The finance sector’s reform efforts must not come to a halt at the divestiture of what presently persists and a prohibition of activities and finance products, but instead, new and more efficient forms of economic intermediation of capital as the conventional banking business must be created. To establish a vision for future structures at the finance market, the historic lines of the banking sector’s development must merely be continued. With the introduction of bank loans’ securitization in the 1970’s, the bank gave up its intermediary position and became advisor and seller of securities. Capital providers and demanders are now directly connected as buyer and emitter of bonds. This ongoing disintermediation process was continued in the 1980’s with the creation of off balance transaction platforms for securitization. The credit derivatives’ upcoming devel-opment in 1990’s yet refined this general trend toward disintermediation and decentralization in the banking sector (Lenz, 2009).
This trend must now be continued in regulatory and economic politics: The web-based transfer-al of capital over Internet platforms will replace conventional banks step-by-step as an intermediary. That the web-based “peer-to-peer lending (P2P)” works successfully is documented by credit-platforms like “smava” in Germany, “Prosper” in the US, and “Zopa” in the UK.
Peer-to-peer lending over a web-based transfer-platform has vital advantages for the “players”:
* P2P-lending is attractive for the investors (creditor) as well as for the credit user (debt-or), because they can share the bank margin, meaning the difference between deposit and loan rates. The platform receives merely a transferal commission. These charges are much lower than the bank margin, because they do not have to finance fancy skyscrap-ers at great locations or bonus payments for investment bankers.
* The platform only takes over the transferal and does not enter into a contractual posi-tion. Hence, there is no systemic risk, because risks are now peripherally distributed throughout the users.
* In turn, investors can diversify the default risk by getting involved in various financing projects with small sums or by joining investor groups via the Internet.
* Money’s undefeatable homogeneity makes it into a product, which is ideally suited for web-based transferals. The advances of information technologies can fully realize its economic benefits here. On the transaction platform, the application of information technologies will clearly increase the transparency, the competition and also the mobility of capital, in comparison to the oligopolistic bank market. Better transparency, increased competition and last but not least, the cessation of bank margins, reduce capital costs and simultaneously simplify accessing capital. From an economic standpoint, these advantages have the potential for a quantum leap within the economic growth of partic-ipating market economies.
* Increased transparency, central processing, and documentation within the transaction platform considerably simplify controlling and supervising finance market transactions. The extensive public resources that have been used for controlling banks so far can now alternately be used to protect investors.
Similarly, as in the securitization of large corporate loans, the web-based transferal enables the mobilization of high capital volume by bringing together numerous savers. The credit default risk, too, is broken up into small amounts and spread throughout the mass of capital providers. But as opposed to how it is in securitization, in p2p-lending, loans are not tradable as bonds at the market. With that, capital providers and borrowers devote themselves to a fixed capital commitment with each transaction, where the interest and capital commitment period can vary depending on the maturity chosen. With this inability to trade, the economy’s credit supply is withdrawn from the daily speculation of the bond market and therefore receives a long-term stabilizing element. In this sense, it is important to guarantee the use of capital for real econom-ic investments. Exclusively, individuals and commercial enterprises are acceptable borrowers. Financial institutions, such as banks, hedge funds, or private equity funds are excluded from the use of P2P-lending.
In the majority of European countries, the economic success and therefore extending peer-to-peer lending is so far blocked by tight legal supervising guidelines for practicing the banking business. For example, according to the German KWG, no banking license is required for the mere transfer of credits, however, bank business can be subject to authorization, especially with respect to platform-users as credit providers and deposit banking on the borrowers’ side. Therefore the BaFin, the German banking supervision authority, examines each individual case (Mitschke, 2007). Consequently, the legal position in Germany is not very concrete. Comparable to for instance Basel III regulation there should be a G20 agreement about standards and super-vision for internet-based credit transfers.
In a place of legal certainty, the P2P-market will in the future guarantee the economy’s credit supply. A multitude of multinational enterprises will operate transaction platforms for capital transferal. Predestined for this, are corporations with Internet sales departments and a large client base, such as Amazon or Ebay. The market could also be of interest for providers of communication technologies like IBM or Apple and telecommunication corporations like Deutsche Telekom AG or AT&T. In the corresponding legal realm and under sufficient supervision, capital transfer would be possible through social networks like Facebook or Linkedin. With respect to the financial knowledge and the extent of the customer base, banks could also operate the transferal platform, as long as a strict institutional separation from conventional banking busi-ness is provided.
The finance market of the future consists of a network of regional commercial banks that process payment transactions and grant loans to regional customers. Parallel to this, there are a multitude of web-based transaction platforms for the transferal of capital. This global world of finance will, however, function without banks, because for the mere transferal of capital no lo-cal “players” are needed.”
: Get rid of banks and build up a modern financial world! Paper for the 17th Workshop on Alternative Economic Policy in Europe in Vienna/Austria, 16-18 September 2011. Rainer Lenz