New Lending For A New Economy Lawrence H. Summers 1. Secular stagnation: across developed economies, deflationary pressures are substantial. 20.0 Actual and Potential GDP, U.S.A. (Trillions of 2009 dollars) 19.0 18.0 17.0 16.0 15.0 Potential GDP, 2007 Estimate Potential GDP, 2014 Estimate 14.0 Actual GDP 13.0 2006 Source: CBO 2007 2008 2009 2010 2011 2012 2013e 2014e 2015e 2016e 2017e 2. Downward trend in rates: capital is abundant, but we need to promote investment. 7 Natural Rate of Interest, form Laubach and Williams (2003) 6 5 Percent 4 3 2 1 0 -1 1960 1970 1980 1990 2000 Source: Updated estimates from www.frbsf.org/economic-research/economists/john-williams 2010 3. Growing bank spreads: net yield at an all-‐time high. Net Bank Yield 4. Improving the experience: New lenders are driving higher customer satisfaction than incumbent banks. Net Promoter Score (Would you recommend to a friend?) Lending Club Credit Unions Community Banks Regional Banks Credit Cards National Banks 0% Source: Lending Club 10% 20% 30% 40% 50% 60% 70% 80% 90% 5. Lowering costs: Lending Club has significant operating cost advantage vs. banks. Source: Lending Club, McKinsey & Company 6. Better underwriting: More data and use of technology are enabling smarter credit decisions. OnDeck Score Version 5 vs. FICO vs. No Underwriting Source: Morgan Stanley, OnDeck company data 7. Complex regulatory landscape: Policymakers need to speed up regulatory clarity. Relevant federal banking and securities laws: Relevant federal regulators: • • • • • • • • • • • • Equal Credit Opportunity Act (ECOA) Fair Housing Act (FHAct) Bank Secrecy Act/OFAC Truth in Lending Act (TILA) E-Sign Act (FDIC) Dodd-Frank - Wall Street Reform and Consumer Protection Act Know Your Customer (KYC) Fair Debt Collection Practices Act (FDCPA) Fair Credit Reporting Act (FCRA) Fair and Accurate Credit Transactions Act (FACTA) CARD Act (CARD) • • • • • • • • • • Source: Foundation Capital, Congressional Research Service Securities and Exchanges Commission (SEC) Federal Reserve (FED) Financial Industry Regulation Authority (FINRA) Office of the Comptroller of the Currency (OCC) Federal Deposit Insurance Corporation (FDIC) National Credit Union Administration (NCUA) Consumer Financial Protection Bureau (CFPB) Federal Trade Commission (FTC) Financial Stability Oversight Council (FSOC) Commodity Futures Trading Commission (CFTC) Federal Housing Finance Agency (FHFA)