The Future of Capital

You wouldn’t expect The Economist, that mainstay of capital journalism, to be questioning the role of banks, but that is the subject of a briefing in their last...

You wouldn’t expect The Economist, that mainstay of capital journalism, to be questioning the role of banks, but that is the subject of a briefing in their last final regular issue of 2012. They ask what will fill the ‘bank-shaped hole’, what will take the place of banks, focusing in particular on Europe, which they know best. A telling quote: ‘[T]his is a time of huge opportunity in finance—as long as you are something other than a bank.’

Co-operatives are aware that the times are changing, that the dominant thinking in so many areas—finance, trade, employment—is more receptive to a variety of approaches. Methods and practices that would have been dismissed out of hand a decade ago are now given serious consideration by policy-makers, business leaders, and the media.

Capital is one of the areas where change is needed, and it forms one of the five key strategy areas in the Blueprint for a Co-operative Decade that ICA recently adopted, with the goal of securing co-operative capital that doesn’t jeopardise our principle of member control.

One of the promising trends The Economist reports on is peer-to-peer platforms, where for example small firms sell their unpaid invoices to investors at a discount. This is, of course, still a capital-based model, but the interesting message in the briefing is not where the structure is today, but the direction in which it is heading. Private placement is also on the rise, with household name corporations increasingly using retail bond markets, the article reports, to raise capital from individual savers. 

Many of the fundamentals still remain, of course. Credit-worthiness is a trait everyone seeking capital must demonstrate, even to investors expecting little or no return, but who have a social outcome in mind. Perhaps peer-to-peer lending brings with it greater knowledge among the parties of creditworthiness.

Another issue in securing capital is transaction costs: how do you keep the capital from being inefficiently used by the process of getting it where it needs to go. Large transactions are traditionally more efficient in this, as they can spread the transaction costs. But perhaps peer-to-peer platforms could improve that ratio?

The briefing is encouraging in spotting another trend, the increasing respect for longer-term, less liquid assets. Leveraged loans to social housing is specifically cited as one example. The Economist blames the dominance of banks for the lack of a meaningful pool of institutional investors with expertise in less creditworthy and less liquid assets. The co-operative community ought to be able to gain expertise and demonstrate credibility in this area, as least regarding co-operatives.

Finally, the article notes a growing ‘reliance on alliance’, whereby various types of institutions (banks, pension funds, law firms, insurers) form syndicates that allow them to allocate risk in different proportions at different times in a project, i.e. they ‘syndicate to originate’ structured debt. Here, too, there seem to be co-operative opportunities.

There is not a ready-made solution for co-operative capital in this briefing, but there are encouraging directional signals and some examples to follow and perhaps emulate. It promises to be a fascinating decade in finance.

Wishing you all the joy and peace of this Season and all the best the New Year offers!

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