james
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Post by james on Oct 11, 2016 14:24:21 GMT
He doesn't like maturity transformation, but then neither do I, so that doesn't make him special. Well, on maturity transformation that FT story ( direct link for subscribers) wrote "lenders should avoid the practice of “maturity transformation”, where platforms lend money for longer than it was originally borrowed for". Naturally few people want platforms to routinely let money stay lent for longer than it was originally borrowed for but that's not what I understand to be the usual meaning of maturity transformation. As I understand it, maturity transformation usually means the practice of originally lending money for longer than it was lent for by those providing he finance. That is what led, to the downfall of Northern Rock which lent money on mortgages while borrowing on medium term money markets for a few years. When the money markets dried up, cash flow then drove Northern Rock out of business. Some of the closest to that which I see in P2P today is the MoneyThing practice of loans that renew every six months. Going to be some unhappy lenders if their money is not released at the end of the six month term because no replacement lenders are available, and perhaps an unhappy borrower as sell if told they must urgently repay a large portion of he loan sooner than anticipated.
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bigfoot12
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Post by bigfoot12 on Oct 11, 2016 14:30:15 GMT
He doesn't like maturity transformation, but then neither do I, so that doesn't make him special. Well, ... that FT story ... wrote "lenders should avoid the practice of “maturity transformation”, where platforms lend money for longer than it was originally borrowed for". As I understand it, maturity transformation usually means the practice of originally lending money for longer than it was lent for by those providing he finance. That is what led, to the downfall of Northern Rock ... You are both saying the same thing. The FT said lend for longer than it was borrowed for! I think the the closest thing are the Ratesetter 1m accounts, Wellesley, and AC's QAA (but at least that holds large amounts of cash).
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SteveT
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Post by SteveT on Oct 11, 2016 14:35:00 GMT
Funding Secure operates on much the same basis (6 month loans, many regularly renewed). The difference currently is that a very high % of MT lenders are opting to renew, not least because MT are immediately repaying those that do not, whereas many recent FS property renewals have seen sub-50% opting to renew. One large recent FS renewal failed to fill and is now awaiting repayment by the borrower from another source.
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james
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Post by james on Oct 11, 2016 14:41:21 GMT
You are both saying the same thing. The FT said lend for longer than it was borrowed for! That's not what maturity transformation usually means - it usually means borrowing for a longer term than the lending. Which produces that Northern Rock style of risk. Lending for longer than the borrowing term is fine because that doesn't have the same risk issue, just the need to find new borrowers to keep the money invested. I think the the closest thing are the Ratesetter 1m accounts, Wellesley, and AC's QAA (but at least that holds large amounts of cash). Yes, I think those all involve some maturity transformation and hence term risk. Funding Secure operates on much the same basis (6 month loans, many regularly renewed). The difference currently is that a very high % of MT lenders are opting to renew, not least because MT are immediately repaying those that do not, whereas many recent FS property renewals have seen sub-50% opting to renew. One large recent FS renewal failed to fill and is now awaiting repayment by the borrower from another source. Thanks, yes, also seems to be in effect maturity transformation going on at Funding Secure if the borrower is told that the lending would be for longer than six months at loan inception. In the short term at least I assume that MoneyThing would look to use their float to extend the offering period and perhaps also delay pending loans in the pipeline to try to encourage take-up of a loan that didn't stay filled.
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SteveT
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Post by SteveT on Oct 11, 2016 14:55:30 GMT
FS borrowers are under no illusion that their loan is for longer than 6 months, since they must find the 6 months of interest before any renewal loan can be launched. That said, they may expect that a renewal will be available and be left in an awkward situation if / when it is not.
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bigfoot12
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Post by bigfoot12 on Oct 11, 2016 15:21:10 GMT
That's not what maturity transformation usually means - it usually means borrowing for a longer term than the lending. Which produces that Northern Rock style of risk. Lending for longer than the borrowing term is fine because that doesn't have the same risk issue, just the need to find new borrowers to keep the money invested. I think that you are the wrong way round. If I borrow for a long term and lend for a short term there is no risk that I will need money quickly. It is the other way round which has a risk such as Northern Rock which borrowed for a short term (customer deposits and money markets out to six months) and lent for a long term (25 year mortgages).
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james
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Post by james on Oct 11, 2016 18:31:21 GMT
That's not what maturity transformation usually means - it usually means borrowing for a longer term than the lending. Which produces that Northern Rock style of risk. Lending for longer than the borrowing term is fine because that doesn't have the same risk issue, just the need to find new borrowers to keep the money invested. I think that you are the wrong way round. If I borrow for a long term and lend for a short term there is no risk that I will need money quickly. It is the other way round which has a risk such as Northern Rock which borrowed for a short term (customer deposits and money markets out to six months) and lent for a long term (25 year mortgages). From the borrower's point of view it's long term borrowing which is safest. But maturity transformation is from the investor's point of view, not the borrower's.
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bigfoot12
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Post by bigfoot12 on Oct 12, 2016 8:08:11 GMT
I think that you are the wrong way round. If I borrow for a long term and lend for a short term there is no risk that I will need money quickly. It is the other way round which has a risk such as Northern Rock which borrowed for a short term (customer deposits and money markets out to six months) and lent for a long term (25 year mortgages). From the borrower's point of view it's long term borrowing which is safest. But maturity transformation is from the investor's point of view, not the borrower's. I think we should be and AD was talking about it from the institution's point of view i.e. the bank or the P2P company - they are the one with the mismatch.
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Post by wengyeeRelendex on Oct 12, 2016 9:34:58 GMT
Just to offer a platform's thoughts:
In our view ‘maturity transformation’ in the context of P2P means any opaque offer by a platform to take out platform lenders early (sometimes at a reduced rate or a penalty). This creates an illusion of a deposit like offer which understandably concerns the regulator and the major traditional lenders.
That said, a liquid secondary market is the way forward provided it is clearly disclosed to lenders that the platform itself is no way guaranteeing liquidity. Platforms should maintain neutrality and just match borrowers and lenders. Extending borrower term in specific cases is separate and can be useful to mitigate defaults. However, % of loans paid on time should be good indicator of quality of underwriting by a platform.
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