PROPIEDADES REQUERIDAS DE UNA LECHADA DE

5.4.1 Comparison of Predicted versus Observed Development

The development of P2B and mini-bond lending since the financial crisis generally fits the trajectories predicted by the VoC framework. While both types of lending are present in both economies, the significant differences in the observed lending volume for each channel are consistent with the predicted dominance of P2B lending in the UK and mini-bond lending in Germany. The direct lender-borrower relationship in mini-bond lending is more characteristic of relational bank lending in CMEs, while the intermediation of online platforms in the P2B channel is more characteristic of the market-based lending associated with LMEs. Market- based P2B lending characteristics are also stronger in the UK than in Germany, influenced by the impact of the regulatory environment on the business models for P2B lending in each country.

Comparative advantage of LMEs versus CMEs is reflected in the divergent development of the two channels. In the UK, P2B lending platforms gain comparative advantage by being concentrated in London, where they can easily access risk capital and large pools of workers with finance and technology expertise. Banking and finance activity is less geographically concentrated in Germany, and most of the P2B platform operators are based outside of Frankfurt, the country’s main financial centre. In Germany, this regional distribution of financial institutions has been a positive factor supporting the development of the mini-bond market, as the six regional financial exchanges were quick to introduce listing segments for mini-bonds issued by firms within their respective regions that broadened the base of potential investors. The analysis of the data for repeat borrowing confirms the VoC prediction that mini-bonds lending is a source of patient capital. The analysis indicates that P2B lending is unlikely to be a source of patient capital because the intermediation strengthens the link between a firm’s current financial performance and access to P2B funding. The power of P2B platforms to determine whether a prospective P2B borrower obtains a loan has increased as P2B investors have increasingly elected to have the platform select loan investments on their behalf. This increases the relational distance between investors and borrowers, and increases the link between borrowers’ financial performance and access to finance because the platforms’

lending decisions are influenced by the need to compete for investors on the basis of the financial return they can produce versus other investment alternatives.

The approach to policy and regulation also fits the VoC prediction. Policy initiatives and regulatory change in the UK have been strongly supportive of P2B lending, underpinned by a desire to increase market-based competition in financial services. At the same time, the regulatory framework for mini-bonds in the UK is much more restrictive than the comparable mini-bond legislation in Germany, where platforms have had to adopt business models which have reinforced the incumbent position of banks within the financial system.

5.4.2 Limitations of the VoC Framework as an Explanatory Model

The trajectories of mini-bond and P2B lending development generally fit the VoC prediction, but the analysis also reveals limitations of VoC as an explanatory model. The framework was originally conceived to explain institutional similarities and differences among the developed economies and predict how these institutional arrangements influence policy decisions, firm behaviour, economic performance and institutional change (Hall & Soskice, 2001:1). The propositions regarding institutional arrangements of CMEs and LMEs provided the basis for predicting an outcome, in this case the development of the two lending channels. However,

the VoC framework does not provide an explanation about why the institutions in each

economy came to be in the first place. As a result, the VoC model does not provide the explanatory insight needed to intervene in order to change outcomes. Applying the VoC thesis to explaining the development of mini-bond and P2B lending falls short in three areas. First, the observed development of alternative financing channels indicates that the ‘bank versus market’ dichotomy used to describe the financing of firms in CMEs and LMEs may be too superficial to capture the variation of lending practices within each economy. The explanatory power of the model is weakened by failing to account for the presence of mini-

bond and P2P lending in both the UK and Germany, despite these two countries being

frequently cited by VoC analysts as the ideal type representations of LME and CME financial systems. The macro-level analysis at the level of institutional arrangements implies that firms have less latitude than they are predicted to have in pursuing alternatives to those prescribed by the institutional arrangements in which they are embedded.

Second, VoC provides little insight into how bank lending practices will change as a result of the development of alternative lending channels. VoC assumes institutional change is a result of firms adjusting to an exogenous shock, and seeking to re-establish equilibria that sustain the comparative advantage existing prior to the shock. This is an overly-functionalist perspective on the sources and process of institutional change, and underestimates the complex interaction among multiple contemporaneous factors. While the financial crisis was an exogenous shock, there were other forces of change to the banking system that were

endogenous and unfolded more gradually following the financial crisis. In the UK, for example, banks were engaged in series of dubious business practices, from rigging Libor rates and front- running foreign exchange trades to mercenary business lending practices, which produced a constant drip feeding of negative news stories until well after the peak of the crisis had passed. This produced very negative public sentiment against banks and fuelled a broader social movement advocating greater economic equality which, in turn, influenced the sentiment among policy makers enacting changes in financial services regulation that began forcing change on banks. In parallel, the FinTech movement emerged in Germany, the UK and many other countries with a mission to ‘democratise finance’ by exploiting advancements in data analytics to disintermediate banks in areas of their business where they were popularly perceived to be ‘ripping people off’ (Hinrikus, 2017). The complexity of the variables producing

change in incumbent lending practices may be better conceptualised as nested change, with

banks being forced to respond to developments in multiple, layered fields (N. Fligstein, 2001),

only one of which is occupied by alternative lenders.

Finally, the VoC framework falls short in explaining the behaviour of the investors in alternative lending. The firm-centric perspective of the VoC approach predicts the motivation of firms to solve ‘coordination problems’ by seeking mini-bonds or P2B loans as an alternative to bank loans, and which form of lending should be dominant in each country. Firms adopting new

finance practices are the institutional entrepreneurs in this conceptualisation, playing the role

of the adopters of new finance practices and catalysing change by abandoning incumbent

practices. However, the willingness of the firms to seek non-bank financing is a necessary but

not sufficient condition for change, because their ability to obtain alternative funding is dependent on the willingness of investors to supply the funding. The willingness of UK investors to supply P2B loans via intermediated online platforms is consistent with the VoC perspective regarding the role of public information sources and market-based relations in the financing of LME-based firms. VoC offers less insight in explaining why individuals should be motivated to invest in mini-bonds. If bank lending in Germany is dependent on private sources of information and network monitoring mechanisms, then why did individual investors lend if they cannot access equivalent sources of information and monitoring? This is an intriguing question, particularly given the extraordinarily high default rate for mini-bonds listed on the regional financial exchanges in Germany, which suggests that investors did not accurately

assess the default risk of the bonds they were buying. VoC may be more useful as a predictive

model rather than an explanatory model, at least in the case of comparing cross-national

finance practices, given other mechanisms influencing the behaviour of economic actors. The next chapter explores a complementary explanation for the development of alternative lending, by investigating trust as a determinant in the willingness of investors to supply the capital needed to fund mini-bond and P2B loans.