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Trying to research this for some time, but can't really find anything relevant.

As it currently stands borrowing can be one-to-one: 1 customer borrows money from 1 bank. And can be one-to-many: 1 company or country borrows money from many lenders by issuing bonds. The most popular bonds (government bonds) can be traded even on exchanges.

However there is no such thing as many-to-many lending. Why? Many to many lending would mean there are multiple borrowers and multiple lenders on both sides of the same asset where the borrower's payments are redistributed to the lenders.

In a possible implementation there are fixed rate annuity bonds with various maturity dates.

  • To borrow: you choose which bond you want to issue from the list of bonds designated for many-to-many lending. Then the broker issues those bonds and sells them on the market for market price to raise the money for you. You have to pay the coupons to the lender + some risk premium (based on the credit rating of the borrower) to the broker which goes into a fund to be able to pay to the lenders in case of a default. The risk premium can be an ongoing payment or can be part of the broker's initial quote. The borrower can buy back the bonds from the market if they wish to pay back early.

  • To lend: you buy these bonds just any regular bond.

This is not meant to be a replacement of the existing debt market, just an interesting addition.

Interesting properties of this system I can foresee:

  • That borrowers don't need to issue a new bond every time they borrow, instead they can use a common asset that are probably actively traded on an exchange so they have access to market prices thus can find the best bargain easily. Making the market more liquid than the usual bond market.

  • Properly chosen risk premiums can minimize the risk of default.

  • Balancing forces: increasing interest rates reduce bond prices and encourage both borrowers and lenders to buy bonds, driving prices up and decreasing interest rates and vice versa.

  • Borrowers benefit from increasing interest rates: it becomes cheaper to buy the bonds back from the market for early exit. In a regular fixed bank loan the opposite is true.

So why don't we have something like this yet? I don't see any fatal flaws yet that could make such system impossible.

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  • $\begingroup$ Have a think about why different borrowers (with the same load period) have to pay different interest rates $\endgroup$ – EnergyNumbers Jul 29 at 17:08
  • $\begingroup$ @EnergyNumbers Risk premium? Or is it something else? Updated the question a bit. $\endgroup$ – Calmarius Jul 29 at 18:34
  • $\begingroup$ Yes, risk premium is one thing. And by extension, so is understanding what a particular borrower's risk premium is. Who determines a borrower's risk premium? $\endgroup$ – EnergyNumbers Jul 29 at 19:49
  • $\begingroup$ @EnergyNumbers The bank/broker or whatever the borrower has his securities account at. They determine it the same way they determine it for other kinds of loans - looking at blacklists requesting the credit score if available, secured or unsecured etc. $\endgroup$ – Calmarius Jul 29 at 20:24
  • $\begingroup$ OK, so now your broker is doing the term matching of multiple lenders to multiple borrowers, as well as doing the risk assessment of the borrowers. In other words, you've reinvented the bank. $\endgroup$ – EnergyNumbers Aug 11 at 17:04

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