Form Of Financial Intermediation Research Articles

The Characteristics of Peer-To-Peer Applicants

In recent years, the differing forms of social lending have become a widely researched area. One of the most extensive business models is peer-to-peer lending (P2P), in which an online platform connects lenders and borrowers. The segment’s rapid growth has attracted the attention of market participants and created a deeper understanding of this new form of financial intermediation. The purpose of this article is to contribute to the existing literature by examining the borrower side of P2P lending. The analysis is based on a unique, manually collected dataset from a market-leading platform in the United States. We use LASSO regression to examine the relationship between applications and a wide range of local microeconomic and socioeconomic indicators. Then we apply k-means cluster analysis to identify borrower groups with similar characteristics. The results indicate a strong positive correlation between the portion of mortgage delinquency and demand for P2P funding. Furthermore, the platform’s customer base significantly overlaps with bank clients.

Bibliometric analysis of research on renewable energy crowdfunding: An assessment and policy implications

Crowdfunding is a new form of financial intermediation that has been used to fund renewable energy projects. However, research on the significance and evolution of renewable energy crowdfunding is scarce. The present paper provides a bibliometric analysis of the existing academic work on renewable energy crowdfunding. We identify three main clusters of publications: (1) renewable energy crowdfunding as an innovative solution to the technological and financial barriers to the deployment of renewable energy, (2) the success factors of crowdfunded renewable energy technologies, and (3) the links among the private actors involved in the energy transition. We show that the literature on renewable energy crowdfunding overlooks public interventions. We suggest that the state support crowdfunding to promote the development of renewable energy projects, and we discuss state interventions and the role of the state in regulation and investment.JEL classification: D14, Q28, Q48.

Open Banking: Regulatory challenges for a new form of financial intermediation in a data-driven world

Data has taken immense importance in the last years. Consider the amount of data that is being collected worldwide every day, industries are reshaping their activities into a data-driven business. The digital transformation of all industries, portent of the fourth industrial revolution, is creating a new kind of economy based on the datafication of almost any aspect of human social, political and economic activity as a result of the information generated by the numerous daily routines of digitally connected individuals and technology. The financial services industry is part of this trend. Embracing the digital revolution and creating the right foundations allow incumbent financial institutions to disrupt their own business model. Hence, financial institutions are creating new businesses within their existing structures that adapt and collaborate to meet the challenges of digital transformation and make better use, faster, of their enduring source of competitive advantage – their own customer insight. Open banking and banking as a service (BaaS) are emerging as new forms of intermediation in the financial system that portraits positive and negative externalities for the financial system. Both concepts – open banking and BaaS – refer to the use of open Application Programming Interfaces that enable third parties to build applications and services around a financial institution that exposes its data and/or its infrastructure. The use of these schemes represents a new form of intersection between data and finance, which is changing the way traditional products, services and customer experience traditionally work in the financial sector. This paper explains the open banking and BaaS foundations and what they exactly entail. It also explores the benefits and risks that this interaction between financial institutions and third parties portrait for the financial services industry and analyses from a comparative perspective the different approaches financial, data privacy and competition regulators have implemented to boost open banking phenom. This paper argues that the compulsory approach to open banking is not in all cases the best approach for capitalizing the benefits of open banking and managing its risks. Indeed, some regulators have proposed a compulsory approach to open banking regulations to increase competition in retail banking or in the payment systems. In opposition, this paper argues that open banking and BaaS models in the financial industry might lead to more concentration and these risks have been understated by financial regulators and competition authorities. Finally, we provide some policy recommendations regarding open banking regulations, such as: the same regulatory approach should not apply to all jurisdictions, regulators should encourage reciprocity, especially when choosing the compulsory approach, coordination among different regulatory authorities is needed on a national and international levels, risk-based regulation is a correct type of approach, and monetization of data should not be restricted for incumbents.

Financial intermediation in private equity: How well do funds of funds perform?

This paper focuses on funds of funds (FOFs) as a form of financial intermediation in private equity (both buyout and venture capital). After accounting for fees, FOFs provide returns equal to or above public market indices for both buyout and venture capital. While FOFs focusing on buyouts outperform public markets, they underperform direct fund investment strategies in buyout. In contrast, the average performance of FOFs in venture capital is on a par with results from direct venture fund investing. This suggests that FOFs in venture capital (but not in buyouts) are able to identify and access superior performing funds.

The New Era of Global Economic Growth and Urban Infrastructure Investment: Financial Intermediation, Institutions and Markets

In the aftermath of the global financial crisis, questions have been raised about the capacity of banks and related savings institutions to play their traditional roles in financing urban and regional development. Drawing on the theory of intermediation, this paper suggests that, over the past twenty-five years or so, these types of organizations have lost out to new forms of financial intermediation. As a result, in some countries financial services ‘deserts’ coexist with overwhelming market opportunities concentrated in certain cities and regions. Implications are drawn for urban and regional growth in circumstances where bank solvency is an issue, and where new kinds of intermediaries have come to market seeking to realize the value embedded in urban economies. Referencing the experience of Europe and Krugman’s argument that we are in the midst of an economic depression, the paper provides a stylized account of how the ‘new’ financial intermediaries have begun to fill the vacuum left by traditional intermediaries by investing in urban infrastructure. The paper closes with a brief assessment of the costs and consequences of the global surplus of saving for the development of cities and regions.

Innovative financial intermediation and long term capital pools for infrastructure

Purpose Developing countries are increasingly looking to private sector investment for infrastructure development. Successful development of private infrastructure projects, however, depends on adequate availability of long-term debt to complement private sector equity. As domestic bond markets in many emerging countries are not very deep, availability of long-term debt funding for infrastructure has been limited. Recently, a new form of financial intermediation has emerged in India with the creation of infrastructure debt funds (IDFs) to create capital pools for long-term debt funding. This paper aims to analyse the effectiveness of IDFs for financing infrastructure projects. Design/methodology/approach This paper uses a case study approach. The case studies were written using both secondary and primary information. Secondary information was obtained from various sources such as policy papers, websites and other published sources. Primary information was obtained from interviews with the top management of three IDFs. Information obtained from multiple sources was triangulated for consistency and correctness. Findings IDFs have emerged as an effective intermediation mechanism for attracting long-term capital by offering a new investment product with appropriate risk-adjusted returns. For the fund seekers, IDFs are able to provide long-term capital at lower rates and higher flexibility. Unlike commercial banks, IDFs are able to add value to the projects apart from funding by periodic monitoring of the projects. Practical implications Creating new forms of financial intermediation can help in reducing the financing gap for infrastructure projects, especially in emerging countries. Originality/value IDFs have been analysed from a perspective of financial intermediation. The effectiveness of IDFs in bridging the funding shortfall has been evaluated from multiple perspectives.

Analytical framework on credit risks for financing small and medium-sized enterprises in Asia

Small and medium-sized enterprises (SMEs) account for the major share of employment and dominate the Asian economies. These economies are often characterized as having bank-dominated financial systems and underdeveloped capital markets, in particular venture capital. Hence, offering new methods for financing SMEs is crucial. Hometown investment trust funds are a form of financial intermediation that was started recently and has since been adopted as a national strategy in Japan. In the present paper, the authors explain the importance of SMEs in Asia and describe hometown investment trust funds. They then provide a scheme for credit rating of SMEs, employing two statistical analysis techniques, principal component analysis and cluster analysis to analyse the credit risks of a sample of Asian SMEs by using their financial variables. This comprehensive and efficient method would enable banks, to group their SME customers based on their financial health, adjust interest rates on loans and set lending ceilings for each group. Moreover, this method is applicable to hometown investment trust funds around the world.

Financial Intermediation in Private Equity: How Well Do Funds of Funds Perform?

This paper focuses on funds of funds (FOFs) as a form of financial intermediation in private equity (both buyout and venture capital). Compared to investments in hedge funds or publicly traded stocks, private equity investments in direct funds are less liquid, less easily scaled and have higher search and monitoring costs. As a consequence, FOFs in private equity may provide valuable intermediation for investors who want exposure to the asset class. We benchmark FOF performance (net of their fees) against both public equity markets and strategies of direct investment into private equity funds. We also examine the types of portfolios private equity FOFs create when they pool investor capital. After accounting for fees, primary FOFs provide returns equal to or above public market indices for both buyout and venture capital. While FOFs focusing on buyouts outperform public markets, they underperform direct fund investment strategies in buyout. In contrast, the average performance of FOFs in venture capital is on a par with results from direct venture fund investing. This suggests that FOFs in venture capital (but not in buyouts) are able to identify and access superior performing funds.

Hometown Investment Trust Funds: An Analysis of Credit Risk

In Asia, small and medium-sized enterprises (SMEs) account for a major share of employment and dominate the economy. Asian economies are often characterized as having bank-dominated financial systems and underdeveloped capital markets, in particular venture capital markets. Hence, looking for new methods of financing for SMEs is crucial. Hometown investment trust funds (HIT) are a new form of financial intermediation that has now been adopted as a national strategy in Japan. In this paper, we explain the importance of SMEs in Asia and describe about HITs. We then provide a scheme for the credit rating of SMEs by employing two statistical analysis techniques, principal components analysis and cluster analysis, and applying various financial variables to 1,363 SMEs in Asia. Adoption of this comprehensive and efficient method would enable banks to group SME customers based on financial health, adjust interest rates on loans, and set lending ceilings for each group. Moreover, this method is applicable to HITs around the world.

The Limited Partnership Model in Private Equity: Deal Returns over a Fund's Life

Private equity (PE) fund managers recurrently close limited partnerships, thereby running several funds simultaneously. Conceptually, the limited partnership model as a form of financial intermediation should not have any impact on decisions about single PE investments and returns. This study takes advantage of a unique database containing cash flow data on 10,566 investments by 702 PE limited partnerships. We note a robust drop in investment returns once a new limited partnership is established. This pattern has increasingly emerged since the late-1990s. We conclude that the current governance form of limited partnership model is of questionable benefit in a matured PE industry.

Bank deleveraging, the move from bank to market-based financing, and SME financing

Banks have been lowering their high pre-crisis leverage levels and are preparing for stricter regulatory capital requirements, and in the process have been reducing their lending. With the banking sector expected to shrink considerably, other actors, especially institutional investors, and new forms of financial intermediation will have to meet the credit needs of the economy. This may not only require enhancing and enlarging the perimeter of regulatory oversight, but may also need policy incentives to encourage new forms of market based lending, especially as it concerns financing long-term investment, including infrastructure, and SMEs. This was the background for the discussions at the April 2012 OECD Financial Roundtable that this note summarises. On the current outlook, participants agreed that recent policy actions in Europe have had a positive impact but more and longer-term policy actions will be needed to restore confidence among market participants and set the basis for recovery. Deleveraging is necessary but only about half-way completed. Regulatory reforms should support this process in a balanced way, avoid unintended consequences and help the transition towards increased non-bank intermediation by not imposing bank-like regulation on, e.g., insurance companies and hedge funds. Securitisation should be revitalised – perhaps with some (initial) government and regulatory support – to close the bank lending gap, especially for SME lending. Covered bonds can contribute in this, too, but their benefits may be limited, i.a. due to asset encumbrance. Mezzanine financing instruments could be useful for SME financing, and informal forms of equity financing could help small dynamic start-up companies.

The Role and the Future of Regulation in the Financial Crisis: The Uncertainty Perspective

This paper analyzes the last financial crisis in the perspective of financial innovation focussing on the dynamics of systemic externalities in banking. After discussing the peculiar nature of banking and its external effects to society, it shows that one major determinant of the financial crisis was the failure of regulation to address the evolution of financial intermediation under uncertainty. Differently from the standard explanations, which are variously based on unanticipated opportunism and/or irrationality of financial intermediaries, this analysis suggests that regulation has not been insufficient. On the contrary, regulation has been so overly demanding towards traditional banking to promote unregulated forms of financial intermediation, thereby exacerbating the externalities of financial innovation. In contrast to the initiatives of regulatory reform on both sides of the Atlantic, which address the accidental aspects of the last financial crisis, this paper contends that the overhaul of financial regulation should focus on the general problem of banks’ dealing with uncertainty. As uncertainty makes externalities in banking most dangerous, this approach could fare better in preventing the next crisis. Three major implications are derived from this analysis. First, regulation should avoid inducing banks to make leveraged bets on new forms of short-term funding in order to compete with unregulated intermediaries. The latter should be prevented from engaging in the functional core of banking, maturity transformation, which is the recurrent source of systemic externalities. Second, in relying upon ratings, regulation should correct the incentives it provides to rating agencies to inflate their grades by making them liable for rating intractable uncertainties instead of measurable risks. Finally, regulation should avoid tampering with the corporate governance of banks. Allowing bank managers to protect their autonomy via contractual choices is a more promising solution to short-termism in carrying out financial innovation than regulation of bankers’ pay.

Consequences of Uncertainty for Regulation: Law and Economics of the Financial Crisis

This article analyzes the last financial crisis focussing on the recurrent dynamics of externalities in banking. It shows that two major determinants of the crisis were the uncertainty of a new form of financial intermediation and the failure of regulation to cope with its externalities. Differently from more standard explanations, which are based on opportunism and/or irrationality of financial institutions, this analysis suggests that regulation has not just been insufficient. Regulation has contributed to financial instability too, supporting fragile conventions to handle uncertainty and encouraging regulatory arbitrage through financial innovation. Three implications are derived from this analysis and contrasted with the ongoing reforms of financial regulation in the US and in the EU. First, regulatory arbitrage is better dealt with by protecting banking from disintermediation than by extending prudential regulation to non-banks. Maturity transformation should be defined functionally and reserved to banks. Second, a major danger with ratings is that they support false conventions of safety. To avoid this outcome, the relevance of ratings for regulatory purposes should be reduced and rating agencies should be deterred from rating without verifiable background knowledge. Third, in order to reduce short-termism, regulation of banks' corporate governance should rather question than reinforce managerial accountability to shareholders.

Conflicts of Interest in Financial Intermediation

The last years have seen a surge of scandals in financial intermediation. This article argues that the agency structure inherent to most forms of financial intermediation gives rise to conflicts of interest. Though this does not excuse scandalous behavior it points out market imperfections. There are four types of conflicts of interest: personal-individual, personal-organizational, impersonal-individual, and finally, impersonal-organizational conflicts. Analyzing recent scandals we find that all four types of conflicts of interest prevail in financial intermediation.

On Bankers and Their Incentives Under Universal Banking

In the absence of managerial agency, scope economies in the combination of lending with other forms of financial intermediation may enable multitasking bankers to provide intermediation services more efficiently than specialist commercial and investment bankers. But the incentives of a multitasking banker are different from those of a specialist. This paper develops a multitasking principal-agent model of universal banking to study these incentive effects and identify what activities are optimally combined with lending and under what circumstances. On the one hand, multitasking may reduce the scope of moral hazard in a banker's relationship with the employing intermediary to such an extent that a universal bank not only operates at lower cost than a separate commercial and investment bank in aggregate, but even at lower cost than a commercial bank by itself. On the other hand, even where commercial and investment banking completely overlap in the physical costs of production, agency problems may make universal banking prohibitively expensive or prompt universal banks not to screen borrowers as intensively as commercial banks. These results have implications for the regulation and internal organization of financial intermediaries.

Advice and Monitoring: Venture Financing with Multiple Tasks

This paper focuses on the dual role of venture capitalists as both advisors and monitors in entrepreneurial firms. It proposes a distinction between these two tasks based on the principle that advising is congruent while monitoring is dissonant with respect to entrepreneurial preferences. The analysis shows that despite the resulting conflict of incentives between the two tasks, in equilibrium, an entrepreneur with substantial capital needs will enter into a contract with a multitask financier rather than with an advisor and a monitor separately. This provides an explanation for the existence of venture capital, a form of financial intermediation, in which the tasks of advising and monitoring are fulfilled by a sole financier. Furthermore, consistent with observed features of venture capital contracting, the model predicts the prevalent use of convertible securities together with control rights in the financing of capital-constrained start-up entrepreneurs.

Japan's Financial Markets: The Lost Decade

Recent debates about the state of Japan's financial system focus on the weakness of Japanese banks. But, in the complex financial relations of an advanced economy bank finance cannot be seen separate from other forms of financial intermediation. Despite the reform efforts under the Big Bang program, financial markets in Japan show severe signs of malfunctioning, distortion and backwardness. The paper gives an overview of the current state of markets for money, bonds, equities and derivatives arguing that for reform to become successful measures to develop an entirely different market culture were needed. It calls for a redefinition of the role of interest groups in the financial intermediation process – including the role of government.

Venture capital in Europe and the financing of innovative companies

European venture captial Venture capital is considered to be the most appropriate form of financing for innovative firms in high–tech sectors. Venture capital has greatly developed over the last three decades in the United States, but much less so in Europe, where policy–makers are striving to help channel more funds into this form of financial intermediation. In this paper we provide the first assessment of venture capital in Europe. We document its development in the 1990s and compare it with that of American venture capital. We find the wedge between them to be large and growing. We then look at the involvement of venture capital with some of Europe's most innovative and successful companies, those listed on Europe's ‘new’ stock markets. Venture capital is effective in helping these firms overcome credit constraints, and thus to be born in the first place. Using a unique, hand collected data set from the listing prospectuses and annual reports of these companies, we find European venture capital to have a limited effect on their ability to raise equity capital, grow, and create jobs. We conclude that public support of the European venture capital industry should look at both its growth and at its maturation. – Laura Bottazzi and Marco Da Rin

Brokerage, Intermediation, and Agency: The Financing and Pricing of Commercial Properties

This paper examines a novel form of financial intermediation by studying the role of professional property brokers in the commercial real estate market. We find that broker intermediation is an important feature of the financing of commercial properties. Controlling for endogenous broker selection, we determine that hiring a broker significantly increases the probability of obtaining a bank loan by a striking 18 percent. We find, however, that brokers have only a modest effect on the sale price. Our results are most consistent with the theory that brokers and lending institutions establish informal relationships and provide less support for theories of broker monitoring or certification.

The Regulation of Nonbank Financial Intermediaries

IN THE EARLY STAGES of our economic growth, the commercial banks and life insurance companies were the predominant forms of financial intermediation. They attracted the bulk of the nation's institutionalized savings, dispensed a fairly homogeneous product and were amenable to a simplistic form of regulation. In the post-war period, however, the less regulated and more aggressive intermediaries uch as trust and loan companies in Canada, savings and loan associations in the United States, finance companies, mutual funds and pension funds attracted a progressively larger percentage of the nation's savings. They achieved this growth by offering the public a wide variety of new financial claims and services which more adequately reflected the needs of a complex economy. This shift of economic influence, shown in Tables 1 and 2, began to attract government attention on a noticeable scale in the early 1960's largely through the work of the Commission on Money and Credit and the Royal Commission on Banking and Finance. Their investigations plus subsequent events in the capital market, especially in Canada, indicated the need for a new and comprehensive approach to the regulation of nonbanking financial institutions. In the realm of monetary policy, the development of near-money substitutes is believed by some commentators to have weakened the ability of the central bank to control the economy by its present methods.1 In the broader area of economic stability and growth, the increasing importance of these institutions to the financing of the private sector and their dominance of the capital markets through the institutionalization of savings have raised new problems in such fields as direct control of lending, security regulation, freedom of entry, the value of increased competitiveness, solvency and financial disclosure. The regulation of nonbank financial intermediaries in Canada has been viewed mainly as a legislative problem and, because of this legalistic bias, emphasis has been placed on portfolio controls, capital/liability ratios and chartering requirements. These measures no doubt added to the solvency of the system but they also generated a conservative proclivity and monopoly profits. These features of our financial system were criticized by the Royal Commission on Banking and Finance with the result that, for the first time in Canada, measures have been taken to develop greater competition in our capital markets and among our financial intermediaries. The concept of selective credit controls is presently in abeyance because of the new emphasis on encouraging the flow of funds by competitive market forces. However, the federal government has been forced to recognize that nonbank financial intermediaries, if left to their own devices can create serious disturbances in the capital markets. Provincial governments, who have the legislative power to control some of these institutions, have also been prodded into action after years of lethargy as a result of recent revelations of fraud, mismanagement and excessive assumption of risk by companies within their jurisdiction. Consequently, federal ALIX GRANGER is a lecturer in Investment Management at Simon Fraser University, a member of the Vancouver Society of Financial Analysts, and was formerly an investment analyst with A. E. Ames and Co., Toronto. Mrs. Granger received a B.A. in Political Science and Economics from the University of Toronto and an M.A. in Economics from Simon Fraser University. 1. Footnotes appear at end of article.