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Post by davee39 on Jul 10, 2015 10:51:43 GMT
davee, you are right about the 6% barrier being nonsensical, but it is in there somewhere, at what point do you think we have lost the risk/reward element? I am looking at 3 risk areas. 1) Platform risk 2) Default risk 3) Interest rate increases resulting in the 5yr rate being too uncompetitive. The main competitors for fairly safe 5 yr Lending are Zopa (5%) & Wellesley (5.5%). With Ratesetter the platform risk has decreased as the business has matured & default risk is well protected, so risks 1 and 2 diminishing would tend to drive rates down in a perfect market, while the the risk of a general rates rise is increasing. Overall 5.5% strikes me as a fair level, matching the 5% offered by Zopa due to their higher fee. RS is not in a perfect market. Saver caution and scaremongering by entrenched institutions tends to associate RS with the riskier 12% offerings and the wholly different crowdfunding market.Eventually a mainstream RS should expect to settle at a small risk premium to protected long term savings, but the marketing people still need to get the message across to attract new money. We can also look forward to ISA's and institutional money leading to an influx of cash and inevitably lowering rates, but I see 5% for 5 years as an effective low water mark.
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Post by Deleted on Jul 10, 2015 10:58:25 GMT
I'd think we have to take inflation into account in our "Market Figure" so would that be 5.5%+ Inflation? I only ask because the gov has a 2% inflation target which will destroy capital at that rate? Let's assume CPI of 0.1% at the moment.
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Post by westonkevRS on Jul 10, 2015 11:03:42 GMT
The way I see it, Zopa has been through a full economic cycle and has set their provision fund accordingly. If the RS provision fund is looking stronger it would only be a failure of Kev's allowing the wrong borrowers through the door that would cause a major problem. No pressure westonkevRS, but I hope you are indeed Ace. Indeed Zopa have traded through the full economic cycle, and congratulations on that. Indeed I was a lender through that period. But just to be realistic lenders did experience lower returns due to higher bad debts, there was a platform fund raising and the SafeGuard fund wasn't in place. No P2P "Provision Fund" has been tested through the cycle. Employees for all P2P look very different now to then (100% for RateSetter!), and although data is useful, personal experiences are equally vital. RateSetter does aim to keep growing the Provision Fund, and this certainly is harder when lender rates are high and the portfolio includes a lot of loans less than 12 months in age. But this is my priority and will continue to do my best to try it grow despite platform profitability aspirations. @ westonkevRS
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jonbvn
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Post by jonbvn on Jul 10, 2015 11:46:57 GMT
The way I see it, Zopa has been through a full economic cycle and has set their provision fund accordingly. If the RS provision fund is looking stronger it would only be a failure of Kev's allowing the wrong borrowers through the door that would cause a major problem. No pressure westonkevRS, but I hope you are indeed Ace. Remember that Zopa did not have a safeguard prior to the credit crunch. As with all markets, once you know there is a problem it is already too late.
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teddy
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Post by teddy on Jul 10, 2015 13:32:03 GMT
RateSetter does aim to keep growing the Provision Fund, and this certainly is harder when lender rates are high and the portfolio includes a lot of loans less than 12 months in age. @ westonkevRS Can I ask why? Over the last few months, there seem to have been plenty of borrowers willing to borrow plenty at 6.5%. They all pay in to the PF through their repayments. Surely it's only if borrowers or the amount they borrow decreases as rates rise, that the amount going in to the PF will suffer, but I see no evidence of that having happened.
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Post by p2plender on Jul 10, 2015 14:05:54 GMT
So where's this 'unprecedented volume' of borrowing demand because I can't see it??
I'd be questioning Ratesetter if I was a borrower from 3 weeks ago.
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teddy
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Post by teddy on Jul 10, 2015 18:20:44 GMT
So where's this 'unprecedented volume' of borrowing demand because I can't see it?? I'd be questioning Ratesetter if I was a borrower from 3 weeks ago. There's well in excess of 6 figures at pittance rates being requested by borrowers on both the 3 and 5 year markets.
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Post by westonkevRS on Jul 10, 2015 20:41:57 GMT
RateSetter does aim to keep growing the Provision Fund, and this certainly is harder when lender rates are high and the portfolio includes a lot of loans less than 12 months in age. @ westonkevRSCan I ask why? Over the last few months, there seem to have been plenty of borrowers willing to borrow plenty at 6.5%. They all pay in to the PF through their repayments. Surely it's only if borrowers or the amount they borrow decreases as rates rise, that the amount going in to the PF will suffer, but I see no evidence of that having happened. You can always find borrowers, at any price. And any borrower can be priced accordingly, it's just a numbers game. In fact higher volumes of higher risk customers is technically easier to manage that a smaller number of super-prime customers paying very little (in interest, or as a provision for risk). This is due to statistical robustness and volatility found with large volumes of average customers. The more borrowers you have, luck becomes less important. And ironically higher risk customers can be less impacted by a recession, it's easier to find a rubbish job than one in middle management. My issue is that RateSetter prefers to lend to prime borrowers (despite the above statement) and to be first choice, that's the space we want to own. When you are second choice, e.g. a bank has declined a customers for whatever reason, the risk profile is worse. They have been declined for a reason, that may not be apparent from your data sources. So the same apparent risk profile of customer, lets say 'A' graded customers on whatever scale, will perform differently based on their APR (which is based on the lender return). When you are first choice for the best customers defaults are lower; second choice customers on higher APRs perform worse even if both are 'A' grade customers. So I'd rather (as a Risk Manager, not a lender) have lower lender returns therefore being the first choice destination for borrowers. Rather than sloppy seconds. @ westonkevRS
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Post by westonkevRS on Jul 10, 2015 20:58:30 GMT
The way I see it, Zopa has been through a full economic cycle and has set their provision fund accordingly. If the RS provision fund is looking stronger it would only be a failure of Kev's allowing the wrong borrowers through the door that would cause a major problem. No pressure westonkevRS, but I hope you are indeed Ace. Remember that Zopa did not have a safeguard prior to the credit crunch. As with all markets, once you know there is a problem it is already too late. When the next recession comes, funnily enough I don't think it will be the defaults of borrowers that will be the primary cause of platform failure. Although it will be a contributing factor, the issue will be on of liquidity (like 2008) and profitability. Lenders will seek safety foregoing returns and borrowers will become scarce, and the platforms if consistent with lending quality will do a lot less business. Profitability will fall dramatically (or to be precise, losses will magnify) as they are reliant on new loan income. Banks have deeper pockets, or can simply be bailed out. Platforms may also suffer from lender cash flight at the first sniff of trouble (probably unwarranted, but hell, everyone love a good bank run). Now although some platforms will say that they cannot suffer a bank run because lenders can't demand instant cash returns due to the 1-2-1 matching process, as soon as a platform declines a sell-out or they change the rules then their reputation is bust. Platforms with generous sell-outs may have to tighten criteria, or perhaps their loan-part markets will dry up. All this will be game over. So in summary, it won't be bad debts that do for a platform. Good management and MI will help see this coming and change criteria accordingly (and a £15m Provision Fund helps ). Platform failure will be due to liquidity and lack of capital to get through the working capital reduction. It'll be your fault, the lenders !!! @ westonkevRSP.S. My personal view, not shared by others at RateSetter, is that sell-out should not be allowed or made prohibitively expensive - Bank and Building Society T&Cs never allow you to depart a bond product without a significant cost. Just be glad others are more customer centric, especially those Marketing folks that seem to get a bad rap here.
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jonah
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Post by jonah on Jul 11, 2015 8:08:50 GMT
I agree that it won't be defaults that kills off platforms. Those without a PF for example won't take any hit if the borrowers go bang as it is 100% impacting the lender. The lenders running to the hills and the borrowers also not being interested will kill turnover and therefore the margin on that. So the survivors are likely to be the ones with the best cost to income ratios and those who manage to maintain as much of a trickle as possible.
that said, if instead of a 2008 style crunch it's a 20%+ inflation run, a different set of challenges would be presented. Have to be careful to avoid preparing for the last war.
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pikestaff
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Post by pikestaff on Jul 11, 2015 8:19:16 GMT
It is nonsensical to claim the risk/reward breaks down below 6%, it is a market failure that the rate on 5 year ever got to 7%. Before anyone makes such sweeping statements, let us see where the market rates head after the splash-back I agree with davee39 that the high rates are abnormal, but I don't agree that it is a market failure. I think it's a consequence of RS growing their (potential) borrower pipeline more quickly than they have been able to grow the lender base, and that this is closely related to the wait for P2P ISAs to begin. RS need the borrower pipeline to be big enough to support the wall of money that they expect to flow in when this happens. Meanwhile, there is an imbalance which is manifesting itself in higher rates. I'm sure RS understand this. I think they will have been content to let 5 year rates drift up to 6% but alarmed when they decisively broke through this barrier. They will also have been unhappy to see the lender queue shrinking to almost nothing. Hence the cash back. Whether the cash back has a lasting effect remains to be seen. However, I expect the offer to be repeated if rates revert to much above 6% or the lender queue evaporates once more. When P2P ISAs come on board I'm expecting 5 year rates to drop to below 5%. How much below will determine whether I stay in.
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am
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Post by am on Jul 11, 2015 23:09:44 GMT
I'm wondering what the effect of the holiday season on rates is. At this time of year you might have lenders taking out returned money to pay for their holidays, while there might be additional borrowers wanting to fund their holidays. I've noticed that loans have started filling more slowly at FC these last few days, but I haven't noticed that it has yet translated to higher loan/marginal rates. (The other theory is that large scale flippers are choking on the new E grade loans.)
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gnasher
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Post by gnasher on Jul 12, 2015 5:30:27 GMT
Very interesting thread, thanks all and especially westonkevRS for the great input. Perhaps you are indeed ace! The central point here is what is a fair rate on RS for say 5yr lending? To be honest I have no idea, I am just happy to go with what ever the market decides. For a long time like others I was investing at sub 6%, my lowest 5.3%. That seemed OK at the time as RS is my chosen safe and boring p2p platform. I also invest on AC and TC where on average you can get >10%, but there is a lot of extra DD work and of course there will be defaults. What will these platforms return on average over time? Participating in these platforms will be a complete waste of time if they return less than the average RS 5yr rate (ignoring the platform diversifiction driver). I expect some additional return for the extra effort I put in and stress I experience when things start going bad. I see the safe p2p platforms, RS, Wellesly etc as a benchmark below which I hope my other p2p platforms never fall. So when I started getting 6.8% on RS where previously I was happy with 5.8% I was very happy but a bit confused. Higher rate = higher risk, were my RS investments now more at risk than they were? Was a 6.8% borrower more likely to default than a 5.8 one? Seems unlikely to be a strong link as the 6.8 was purely a product of timing, not an assessment of the risk of that loan, how could it be because as borrowers we have absolutly zippo info about the borrower. Plus who cares so long as the PF holds up. It will be very interesting to see where the rate goes after the CB hump has washed through. For the moment I will stay with RS for all my reinvestments, but at present they are going into monthly with an expectation that we will be back above 6% for 5yr when they mature. Edit : I guess the real issue is overall platform and PF depletion risk. I want RS to be safe and boring. While I would rather get 6.8 than 5.8 for the same risk, I would rather get 5.8 and "every penny back" then 6.8 and start suffering losses which could result in a worse overall return than 5.8. btw what happens if the PF is depleted? Do we only suffer if our particular loans go tits up, or is the pain shared equally amongst all lenders? The latter would appear to be fairer as we are not offered any choice in who we lend to. The former would just be a lottery.
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Post by westonkevRS on Jul 12, 2015 7:02:04 GMT
btw what happens if the PF is depleted? Do we only suffer if our particular loans go tits up, or is the pain shared equally amongst all lenders? The latter would appear to be fairer as we are not offered any choice in who we lend to. The former would just be a lottery. The Provision Fund trustees (effectively members of the RateSetter board, more or less) can call a "resolution event" if the fund is in danger of depletion. The timing and actual methodology is purposefully a little vague to allow it to be implemented depending on circumstances. But it does mean putting all loans together so that people are treated equally rather than suffering risk tied to their individual loans. Some lenders might be forced to have their loans tied up for longer depending on their lending term profile, but ideally nobody would suffer a capital loss as interest would still be being generated alongside income from Provision Fund held assets (i.e. previous bad loans on debt manager plans). But the primary aim is to make things fair, with reductions suffered equally. It goes without saying we never expect to have to implement such an event, but it is documented to provide some clarity. @ westonkevRS
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duck
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Post by duck on Jul 12, 2015 9:09:54 GMT
Very interesting thread, thanks all and especially westonkevRS for the great input. Perhaps you are indeed ace! ... For a long time like others I was investing at sub 6%, my lowest 5.3%. That seemed OK at the time as RS is my chosen safe and boring p2p platform. ...... I agree fully with your post gnasher. As a 'long term' investor with RS I have seen the PF grow and so far have never felt the balance to be far out with respect to the lending volumes. As the years pass and more experience is gained by all concerned my level of comfort has, if anything, increased. My lowest 5yr was £217@ 5.2% on 11/11/2013 and is on-going. Was that a more 'risky' investment than the 6.8s we have been seeing? Possibly, but is it a concern, no.
'Strangely' I see the recent high rates as something of a disincentive to attracting some new investors (the traditional bank / building society savers). When my 'better half' opened her account recently I had to overcome the 'too good to be true' mind-set of somebody who has become accustomed to years of falling rates .... but since it was my re-investments gifts heading into her account she really didn't have an option! I've had similar discussions with friends moaning about the lack of interest on traditional accounts and the usual response to RS 6.8% is 'yes but what is the catch' ..... perversely if I was saying 'you can get an extra 1 or 2%' .....
Don't get me wrong, I'm more than happy with higher rates on RS but I'm also a realist and long term stability at RS is IMO just as/more important to me.
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