Walter Heller famously said that an economist is someone who sees something in practice and wonders if it would work in theory. Economic theory says banks exist because they channel loanable funds more efficiently than individual savers and investors pairing up bilaterally. Those informational, diversification and maturity transformation considerations imply that banks should be able to out-compete peer to peer (P2P) lenders. The stylised fact that few P2P platforms have made a profit to date is in line with this theory. If so, then P2P lenders face a difficult future and they may need to become more like traditional banks in order to survive. Either way, that makes them much less disruptive than they first appear.
Following the financial crisis, net corporate financing has exhibited a similar overall pattern in the UK and the US. But the composition of that financing has been very different – with the net debt stock of UK non-financial corporates falling by more than 20% of nominal GDP. By contrast, in the US the fall was only 10%, and around half of this has since been regained. Why did the two countries’ experiences diverge so much after the crisis? In this post, I argue that the root cause of this divergence was a fall in UK corporates’ demand for debt, rather than a hit to credit supply. Business cycles, and credit conditions appear to be similar in both countries, but in the UK there has been lower demand for corporate gearing from firms, a weaker recovery in M&A activity, and fewer share buybacks than in the US.