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Post by confused on Jul 29, 2017 17:16:48 GMT
Understand - this all fits into place now.
I will wait to see what happens when my 'closure' request is processed.
Thanks for your feedback.
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puddleduck
Member of DD Central
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Post by puddleduck on Jul 29, 2017 18:38:45 GMT
But the lock in only occurs if there are no lenders. In my simplistic view, the market would rectify this by rates rising until equilibrium was reached and lenders returned. That to me feels like a Ponzi scheme - previous lenders funds are locked in, so raise rates to attract new money, to pay off the previous folks.
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Post by diversifier on Jul 29, 2017 19:36:04 GMT
No, that's not correct at all.
Firstly, consider the situation with *no* maturity transformation. P2P isn't the same as a bank, investor has a direct contract with borrower. Therefore, total lending must exactly equal total borrowing. That's what you signed for. Clearly, *un-scheduled* sellout can always only happen with a one-in-one-out policy for lenders. Scheduled sellout happens exactly as you signed up for on the tin, after exactly the stated term you have got all your money back.
Then *with* limited maturity transformation, e.g. The platform is writing both 1-yr and 3-yr loans and bundling them to 1-yr investors. Again you are guaranteed to get all your money back, even with zero investor liquidity, but you will wait a maximum of 2extra years to get everything back. In practice, the average extra duration is about 6 months-ish. That's a soft liquidity risk.
What I would have been uncomfortable with, is if RS were ignoring term entirely. In the one-month market, we'd end up with about 18 months average extra worst-case liquidity risk. That would be unacceptable to me. It seems that RS don't do this, by policy and from their FAQ etc - but the TandC would probably let them do so. My personal position is as a 5yr lender, looking at the flatness of the yield curve, and wondering - a) why the hell am I locking my money up for 5yrs for very little benefit, and b) What does everyone else know that I don't. The second one is actually *far* more important
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Post by diversifier on Jul 30, 2017 9:33:52 GMT
In fact, if you want to call it such, it is *every conventional bank* which is a Ponzi scheme. There is no direct one-to-one mapping between loan and deposit there. Typical coverage ratio of liquid assets (defined by Basel II regulatory requirement) by tier1 capital is 8%. That's not the same as depositor cash, but it's still true than any bank where depositors tried to pull a significant fraction of funds out, would be quickly frozen liquidity-wise. Their internal term is much greater, often financing 25-yr mortgages, and have no separation between depositor terms, the liquidity risk on your current account is 25 years same as your 5-yr bond! uK banks are backed by FSCs
But this is still all liquidity-risk, not capital risk - unless it is an Italian or Spanish bank, which yes are (almost?) all negative real assets now (ie admitting that forbearance isn't an asset).
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