Now this is a good idea

Mr Gyimah said a retail bond market would create competition for small companies’ debt at a time when banks are adopting a “take it or leave it approach” to lending. Research published last week revealed that banks’ loan rejection rates have rocketed sevenfold since before the financial crisis.

A small firms’ bond market would also produce a new asset class for both retail and institutional investors, he said. Individual firms’ bond issues would probably need to be \’rolled up’ with other companies of a similar profile so investors’ risk is diversified, Mr Gyimah added.

“Investors could participate in a basket of a certain profile – established businesses in the North of England for example.”

Although, to be honest, I\’m not sure that such issues would need to be rolled up, securitised (or, dare I use the phrase, turned into a collateralised debt offering or CDO).

There\’s not, as far as I can see, any legal reason why such a market could not exist. It\’s rather that the costs of the current legal system covering bond issues are almost certainly too high. If some chippie in Salford wants £10,000 to upgrade for the coming of the BBC then they certainly don\’t want to pay £50,000 for the bond prospectus.

However, the creation of standard forms, possibly a regulation light system, could help here.

The other side of the market, issuance and secondary trading (such bonds would be illiquid, yes, but a trading system must still exist, we can\’t insist that everyone hold such bonds to maturity) would be, on the traditional methods be hugely expensive. I have a feeling that modern computing and the internet, again certain small legal changes (ie, purely electronic record keeping) could make that cheap too.

And yes, I think that having small and local bond markets would be a very good idea indeed. So much so that I wouldn\’t restrict it to bonds actually: why not have equity markets too?

And before we get to the fraud part: that\’s exactly what the \”local\” bit is all about. We\’d be pushing the fraud prevention down to that local knowledge of the people in the area about the person promoting the scheme. Not perfect of course, but then no fraud prevention scheme is.

Yes, such an equity market would be illiquid as well but the ability to mobilise small amounts of savings would be of huge economic benefit I think.

In one way it would be a step back into the past: this is how business used to be financed. Father\’s still got some Vibroplant shares (I think that\’s right) that grandfather bought simply because he knew the bloke setting the company up all those years ago.

And of course, this plays well to the localism agenda. Heck, you should be able to get the likes of nef on board: if it weren\’t for the horrible fact that some people will make money out of such a system.

The more I think about it the more I like the idea. 15 years back there was a combined fish shop/restaurant in Bath. They wanted to expand and, as an imperfect memory recalls, they raised £750k or so on OFEX to do so. A very expensive way of raising capital, given that it had to be a national offering. There\’s certainly that much local money in Bath and I\’m certain that, given the right structures, that amount could have been raised locally.

Why not a combined local stock and debt market in every county town?

11 thoughts on “Now this is a good idea”

  1. JustAnotherTaxpayer

    “Regional stock exchanges” was actually a LibDem manifesto pledge, Clegg/Cable resurrect it occasionally still.

    Also… Funding Circle exists.

  2. Why not indeed?

    Local does not exclude national options when they are right.

    It removes power from the banks who haven’t judged a business idea on merit in many a long year.

    Yes, unfortunately for some, if I put my money into bonds for a local software company, I will probably want more than the 2% I get in a safer investment, because the risk is higher. But being a social sort of chappie (not socialist just social), I would be happy to put some of my hard-earned doobers into Johnnie’s Arsebook idea, and Pete’s new cleaning service (he wants to invest in 7 new vans with equipment because he just got a 10 year contract with the MOD and the bank is asking the entire family (including the dog, cat and hamster) to guarantee the loan 8 times over and want to charge him 8,5% and commission. I’ll put in £1,000 at 6%.

    Lots of people putting little amounts in. As I am half sensible, I will only invest if convinced or if the return relates to my perception of the risk. If I lose it tough but it won’t sink me (I’m richer than you think eh?), but if there is fraud involved we’ll run the b**ger out of town and internet will makes sure he doesn’t get another chance.

  3. It would make it easier for people to ask their friends and neighbours as well, if a loan were structured as a bond.

    There are also local businesses that might gain from the externalities of investments in other local businesses.

    I am sure that with the right regulatory framework, such an idea could be a great competitor to the banks.

  4. Part of the reason there is a need for such a thing is that banks no longer give local managers discretion to lend based on their knowledge of local conditions.

  5. Business Angels, the Rotary, Lions Club… It’s good ideas, not money, that’s in short supply. Of course getting these and the local Chamber of Commerce to do what is in their charter may be easier said than done.

  6. Zopa already does this for individuals. They use a credit check to give a rating, and there is a forum where lenders can question the borrower.

    The problem with Zopa is that the debt cannot be traded: it has to be held to maturity. I don’t know why.

  7. It *would* be a good idea BUT
    the problem is the EU directive that makes it massively more expensive to offer a debenture to retail investors. Forty years ago, before the Wilson-Healey hyperinflation there was an active stock market for secured loans issued by smaller companies. Now only big-name companies making big issues can afford to issue bonds on the LSE’s ORB because it costs over £100k for the prospectus. I told HM Treasury at the time that it was a stupid idea and explained why; did they listen? Did they heck!
    A hundred, or even 50, years ago regional stock exchanges could issue shares and debentures of local companies to local investors who knew what was going on – now that is forbidden: if you know what is going on you are deemed a criminal for buying shares in the company whose factory is at the end of the road.

  8. Does it make much difference to your average local business if the capital comes as a bond (debt) or a loan (debt)?
    Might the good burghers of Bath care to start a thingy, you know, like a bank, which would invest in (loan to) local companies?
    What’s that? FSA, FSB… EU…? Oh

  9. Is this not contrary to what you tell us about not putting all you eggs in one basket? Ie it not being a good idea for workers to own shares in their own company in case it goes bust and they lose their job and their savings, and international trade in food reducing the likelihood of any given region starving?

    If people invest in their own locale do they not stand an increased risk of losing both jobs and savings if the town suffers a localised downturn?

    Of course they might do better than the overall economy too, but it has increased their exposure to risk, surely?

  10. @ Jim
    re point 1 – Mr Gyimah is advocating investing in a “basket” of local loans – now I think that this is a bad idea because I should prefer that locals lent money to good local businesses and not the bad ones (give me your e-mail address and I can explain this at length), not investing in a single company.
    Point 2 – yes, but they may/should have a better idea of the risk involved than of the risk to some company based 200 miles away trading between Asia and America.
    Point 3 – Not necessarily – some local communities have a more volatile economy that the country as a whole, some have less. The latter are more likely to gear up by borrowing as that is less likely to ruin them, conversely the former are less likely to borrow. Hence a series of localised stock exchanges focussed on both borrowing by and equity investment in local firms would have a lower overall risk than one national LSE.

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