The End of Banking: Money, Credit, and the Digital Revolution by Jonathan McMillan

Author:Jonathan McMillan
Language: eng
Format: epub
Publisher: BookBaby
Published: 2015-02-11T10:31:55+00:00

NOTES

Money market mutual funds (MMMFs) are an exception in that respect, as their fund shares do constitute inside money. MMMFs are, however, part of shadow banking (see Chapter 5).

As Rajan (2006) points out, using the term disintermediation for securitization is a “misnomer,” given the daisy chain of balance sheets that stand between ultimate lenders and borrowers in shadow banking.

Both numbers are from Beck, Demirgüç-Kunt, and Levine (2013).

In 2014, Lending Club was the largest peer-to-peer lending platform in the world and continues to grow strongly. The volume of underwritten loans per quarter surged from approximately $110 million in the first quarter of 2012 to almost $800 million in the first quarter of 2014. In total, Lending Club has underwritten more than $4 billion of loans (see Lending Club’s home page: https://www.lendingclub.com/info/statistics.action). The second largest platform in the United States is Prosper. As of January 2014, Prosper has underwritten more than $1.3 billion of loans, of which more than $350 million were originated in 2013 (see Prosper’s home page: https://www.prosper.com/invest/marketplace-performance). In the United Kingdom, Funding Circle, Zopa, and RateSetter have become the largest companies in this rapidly growing market. Together these three platforms have underwritten a credit volume of over £1 billion (approximately $1.7 billion; see http://uk.zopa.com/, https://www.fundingcircle.com/ and http://www.ratesetter.com/). As of 2014, both lenders and borrowers were often getting better interest rates with peer-to-peer lending than if they had chosen a bank (see “Banking without Banks” 2014).

While the term delegated monitor is also used for banks in the literature, we only use it for the agency that monitors borrowers in the case of disintermediated lending. A delegated monitor finances its operations by charging the lender, the borrower, or both a fee.

The problem is not confined to disintermediated lending, but arises also with financial intermediation. It is sometimes called the double moral hazard problem. For an analytical model, see, for example, Holmström and Tirole (1997).

See Part Two. See also Jiang, Nelson, and Vytlacil (2014), who show that securitized loans remaining on banks’ balance sheets had higher delinquency rates than securitized loans sold to third parties.

See Chapter 5.

See Benmelech and Dlugosz (2010, 175), whose results suggest that corporate bond ratings are, even when accounting for the financial crisis of 2007–08, “well calibrated to the underlying economic risk of the issuer.” Hill (2004, 44) finds that “there is considerable evidence that in the normal course, they [rating agencies] do a good, if not stellar, job.”

See Petersen (2004) on the distinction between soft and hard information. As Petersen states, hard information is almost always recorded as numbers, and soft information as text. Hard information is easily and objectively comparable; soft information is not. Hard information can be collected without personal contact, but soft information has to be collected personally. Also, hard information is more objective, and the person or organization evaluating the information does not need to be the one who collects it. In contrast, soft information cannot be easily transferred to people who were not involved in its collection.

This effect is even present in the case of securitization (see Keys, Seru, and Vig 2012).

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