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?