Cutting out the banker middleman
By Don Tapscott The views expressed are his own.
In the wake of the 2008 global financial crisis, we need to rethink and redesign many organizations and institutions that have previously served us well but are now beginning to falter. Fortunately, the Internet lets us do this. It slashes collaboration costs and makes possible completely new models of combining people, skills, knowledge and capital for economic and social development. Around the world, individuals and groups are working together, developing new businesses based on peer-to-peer (P2P) collaborative networks.
The financial services industry has always been the antithesis of P2P collaboration. Hierarchy is deeply entrenched in this industry, for good reasons such as security, auditing, and regulatory compliance. But we are now seeing the rise of three types of P2P activities in this sector.
First, financial services companies are moving beyond electronic mail, document management and other primitive technologies to new collaborative software suites like Jive and Moxie Software Spaces, which encourage P2P collaboration within corporate boundaries.
Second, financial services companies themselves are beginning to act as peers, and are collaborating rather than treating one another as superiors or subordinates in the supply chain. This is good. The industry needs a new modus operandi, where all of the key players (including banks, insurers, investment brokers, rating agencies and regulators) embrace principles of transparency, integrity, collaboration and sharing of information. For example, banks should open up financial modeling and make pertinent assumptions and data transparent to all interested parties. Among other things, such P2P collaborations could enable banks to value the trillions of dollars in toxic assets that are weighing down their balance sheets.
But the third and most interesting of P2P innovations in financial services is the growing number of lenders and borrowers connecting directly via the Internet and avoiding the cost and frustration of dealing with banks altogether. The goal is to benefit both the lender and the borrower. For example, if one person is now receiving one percent interest on a savings account and another is paying 29% on a credit card, a mutually-agreed 10% rate is a match made in heaven, giving the lender a tenfold increase in return while affording the borrower a chance to begin paying down the principal. Typical P2P borrowers want to consolidate debts and pay off credit cards.
Initial attempts at Internet-enabled loans banks were a disaster. From 2005 (when P2P lending launched in the U.S.) till 2009, P2P startups experienced a boom and then went bust, culminating with regulators shutting them all down. Many investors were burned. In the case of one company, Prosper.com, angry investors launched a class-action lawsuit.
UK takes right step on too-big banks
(James Saft is a Reuters columnist. The opinions expressed are his own)
So it can be done after all.
Britain is poised to take tough steps to break up the large banks it rescued, setting it in stark contrast to the United States, which seems set on a policy of shoring up the unfair advantages it grants its too-big-to-fail banks while regulating around the edges.
It is quite a change for Britain, which has a sorry history of self-serving self-regulation in financial services combined with limp and outgunned official control.
Chancellor of the Exchequer Alistair Darling on Sunday told the BBC that Lloyds, RBS and Northern Rock would be partly broken up and assets sold to new entrants into the banking market. Large existing competitors such as HSBC are expected to be blocked from making bids for the assets.
Britain took over Northern Rock after a run on the bank and its rescue of Lloyds and RBS left it with stakes of 43 and 70 percent, respectively.
It is worth noting that if anything Britain is more dependent on its financial services sector than the United States.
James, this is another extraordinary complex debate you propose here, and I doubt that anyone has a definitive stand to partake. I see it more like an experiment, and Britain has a long history of failed economic experiments. Nevertheless, for observers, it would really become a bonanza of information. Philosophically, I would just point that the size of an enterprise in a competitive market should accommodate a certain granular structure of its clients. It is interesting to see how tuning one side would affect the other.
I cannot abstain from remarking that the political complex you just have described may play a larger role than just to respond to an angry constituent base. It might well be the case that this is the last attempt to save most of the banking system from nationalization. I do not think that any government in the developed world would have the appetite to micromanage its banks. Problem is, it may well become an inevitable pragmatic (i.e. not ideological) solution in not so a distant future, like healthcare, education, power grid and so on.
Financial heaven and hell
– Christopher Swann is a Reuters columnist. The views expressed are his own –
There is nothing like a home-grown financial crisis to undermine a superpower’s sense of superiority. The United States is finding it has something to learn from some of the world’s lowest profile countries.
Among those that are now being held up as role models are Denmark, Canada and Sweden.
This brings to mind the old joke about the European heaven and hell. In a financial heaven you would have Danish mortgages, Canadian regulators and bank rescues would be orchestrated by the Swedes. In a financial hell the mortgages would be Hungarian, the bank regulators would be from Iceland and the Americans would manage bank rescues.
Imitation is the sincerest form of flattery, yet there has been precious little of this. This is probably a result of the continued political influence of the financial oligopoly.
The common thread linking Danish mortgages, Canadian bank regulation and Swedish bank rescues is that they are all less favourable to the financial services sector.
The Danish mortgage system has huge appeal to everybody but entrenched interests. Emulating it in the United states would involve finally putting Fannie Mae and Freddie Mac out of their misery. It would also force mortgage originators to retain the full credit risk of loans, allowing them to palm off only interest rate risk.
The massive failure by the regulators reflects serious structural problems in the regulatory environment. I am a former senior bank regulator and I spent many years in the investment banking world involved in risk management, risk reporting and risk technology. There has been a failure to recognize that the regulatory process can only work if there are good regulatory people looking at the matters every day. Let me offer the following comments:
1. The bank regulators had the authority to examine any aspect of a bank¹s activities. They had the authority to figure out what was going on at the banks and to limit it. The regulators did nothing. So all the new regulations on paper or hiring additional analysts or creating new “early warning statistics” will mean nothing if the regulators cannot or will not do their jobs.
2. Sending a regulator who makes $60,000 dollars a year to examine the activities of sophisticated financial traders who make millions of dollars a year is not a fair battle. And if you have ever worked in a government agency, as I did for over 4 years, you will be intimately familiar with the viciousness of the turf battles among the senior officials. There are dim bulbs and deadwood at the top of the agencies and all of it needs to be cleaned out. A Herculean task if there ever was one.
3. We recently saw the regulators “stress-test” the major banks and compute the additional capital that the banks required to weather the economic turmoil. Then some of the largest banks complained vociferously about the additional capital requirements and the regulators backed off. So much for firm regulation.
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