From Bond Economics (also on blogroll at right), May 30:
The structure of financial markets is influenced by imbalances between how lenders would like to lend, and borrowers would like to borrow. The economist community often refers to “maturity transformation,” but this formulation is too vague to be useful. Instead, we need to look at a few axes of disagreement.
The structure of banks to a certain extent bridge these mismatches, which explains why they are the centre of financial markets. However, non-bank financial instruments can be structured to bridge the gap. It is therefore that there is a continual blurring between bank and non-bank finance as they attempt to move into each other's turf. It is also unsurprising that the so-called “crypto community” has ended up re-inventing the structures of traditional finance, since even internet money faces the same economic forces.
The Mismatches
Borrowers generally want the following.
Borrow at as low an interest rate as possible.
Long borrowing maturity, with an option to pay back early.
Some borrowers are quite willing to take on large loans and not worry about the consequences of default. (This is not universal, in the decades after the Great Depression financial institutions worked to decrease debt aversion among the public.)
Lenders are more varied, with a division by lending horizon....
....MUCH MORE
