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Post by davee39 on Jul 9, 2014 8:07:27 GMT
The default estimate used as part of the provision fund calculation has dropped from 1.8% to 1.5%. I remember this previously being at 1.7, and possibly 1.6. The effect is to raise the cover ratio to 2.3%. Now this is much higher than it has ever been so it may allow RS to reduce the provision fund fee for new loans and compensate for the recent rise in rates. I had imagined that loans might have been getting more risky, but there is possible balancing from secured lending. Unless, of course, their highly esteemed risk manager is away, and the office junior has thrown caution to the winds  . |
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Post by teapothouse on Jul 9, 2014 9:19:55 GMT
I noticed this too. I wonder if RS have gone through the loan book at the half year and redone some sums based on actual default rates. The expected and actual default rates per year have changed lower down.
I hope RS is being cautious in the way that it estimates their anticipated default rates since the level of comfort provided by the Provision Fund (or is it the 100% fund) should not be overstated. The benchmark default rates for comparison will not have changed. Do RS believe that its default rates will be better than the norm?
teapothouse
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Post by mattr on Jul 9, 2014 14:57:41 GMT
As a recently joined Ratesetter lender, I'm finding the RS model to be really interesting. Effectively, we're required to decide the rates we would be happy with on the basis that they are zero risk, because there's no risk info to go on, and the provision fund is expected to pick up the slack. Is that how everyone else sees it? That is all fine and dandy while RS operates the provision fund on a super-cautious basis. However I do worry a bit that there must be a temptation to loosen the requirements of the provision fund, and either take higher fees or offer cheaper borrowing to get more people through the door. Do people with more economic savvy than me feel like the RS info available on the site is sufficient to properly monitor how cautious RS is being? I don't recall seeing any info about creditworthiness of the RS borrower pool.
Matt
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Post by westonkevRS on Jul 9, 2014 19:07:17 GMT
Matt and friends,
RateSetter has changed the methodology for calculating expected losses. Previously the likelihood of arrears was calculated but subsequent recoveries were not sufficiently time factored into the equation. This was overly prudent but now that RateSetter has a number of years of robust data on recoveries, it was decided to use a more accurate longer term recovery rate within the calculation. Recoveries go straight back into the Provision Fund to protect our lenders. As a result the expected losses have reduced and the coverage increased.
I hope that helps and provides reassurance of our continuing prudence.
Kevin.
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Post by westonkevRS on Jul 9, 2014 19:23:37 GMT
Mattr, I think your summary is correct in that our model shouldn't require you to have a detailed knowledge of our borrower book and risk policies. However we do try and be transparent where possible and although Marketing based the following brochure provides some insight and quotes from Equifax: www.ratesetter.com/pages/provision_fund_brochure.htmlYou can even see the video of me slurring.... And besides the Provision Fund is the basis, IMHO the £6m (largest P2P and growing fast) size provides me with the assurance that my job and personal lending cash is safe. Despite not quite being "highly esteemed", but more like "lowly scorned".... Kevin. |
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pikestaff
Member of DD Central
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Post by pikestaff on Jul 9, 2014 19:44:13 GMT
westonkevRS, can you assure us that you will NOT be reducing the provision fund fee for new loans following this change in methodology? From my long experience as an accountant and auditor this kind of change usually ends in tears. I would regard any reduction as a most disturbing development that would weaken the provision fund and increase my risk significantly. I have encouraged friends and relatives to invest in Ratesetter, and this is the first indication I have had that this might not have been wise.
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Post by westonkevRS on Jul 9, 2014 20:32:10 GMT
Pikestaff,
This is essentially a reporting change only. We like to be accurate whilst prudent. It has not coincided with any change to the Provision Fund contribution strategy.
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pikestaff
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Post by pikestaff on Jul 9, 2014 22:01:18 GMT
"not coincided with". Hmmm...
I'd best keep an eye on the cover ratio then. If it starts to fall from the present 2.3 I will know the slippery slope has been embarked on.
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Post by westonkevRS on Jul 10, 2014 5:30:33 GMT
Pikestaff,
I'm always making changes, that's my job! But do keep an eye for sure, in banking they'd call you the 'Fourth Line of Defence'.... And very appreciative I am as well.
Kevin.
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Post by teapothouse on Jul 10, 2014 19:59:36 GMT
Thanks for the info westonkev your insight and committment to the RS cause is valuable to us lenders. When it comes down to it I guess when you set your parameters for the provision fund did your comparisons include or exclude debt recoveries (this is relevant whether the figure should be 1.7%). In terms of multiples of that figure for coverage the bigger the multiple the more likely extreme events can be coped with and for us financial novices does 2.3 provide good protection (it sounds OK) - I do not know how predictable loan books are, but I guess any significant change in the profile of borrowers may affect things a lot. Over time and assuming a stable market, including loan criteria, then the best model is operating experience, and its building up nicely looking at the loan book (but what is the problem with loans in september!).
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webwiz
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Post by webwiz on Jul 16, 2014 14:55:53 GMT
I have only invested in one year loans. My reason is that if we have a meltdown like Zopa 2008 then the PV should be ample to pay out one year investments because it is the same PV for all, effectively using if necessary PV funds deposited to protect 3 and 5 year loans with over one year outstanding. Is this logic correct?
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Post by jackpease on Jul 16, 2014 15:07:40 GMT
>>>if we have a meltdown like Zopa 2008
This was before i was involved in P2P/B. What happened? - i remain very curious how today's platforms would cope with a run eg if property prices tanked
thx, Jack P
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Post by geoffrey on Jul 16, 2014 15:19:38 GMT
>>>if we have a meltdown like Zopa 2008 This was before i was involved in P2P/B. What happened? The default rates started to shoot up, particularly on Listings (loan auctions), which were subsequently cancelled as too risky. Some of the riskier categories of lenders on the main system also showed quite bad defaults and even the B category. It was then that people who had invested in the tempting high rates on listings and C and Y groups began to realize that those rates were an illusion and especially so for higher-rate tax payers. Some people lost quite a lot of money on listings in particular, and became angry. It's not as if they hadn't been warned. Oh, and Zopa Italy was closed down by regulators there, and things looked dire for a while.
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Post by mattr on Jul 16, 2014 16:12:31 GMT
I have only invested in one year loans. My reason is that if we have a meltdown like Zopa 2008 then the PV should be ample to pay out one year investments because it is the same PV for all, effectively using if necessary PV funds deposited to protect 3 and 5 year loans with over one year outstanding. Is this logic correct? From my understanding of the principles of the provision fund, this is not a likely outcome. If at any point predicted defaults go up (e.g. 2008 style meltdown or worse) and it looks like the provision fund might be insufficient to cover all defaults, then the provision fund goes into active management mode and seeks to provide a fair (broadly pro-rata?) payout to lenders who have suffered from defaults. That must include an acknowledgement of likely future defaults on the 3-5 year markets so that short term loans don't simply get queued and paid out first. I would be interested to hear from Westonkev if he agrees with my interpretation. By the way, thanks for your willingness to sell us 3+yr lenders down the river!
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webwiz
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Post by webwiz on Jul 16, 2014 19:05:03 GMT
3 and 5 year loans get a higher rate of interest, I naively thought that this was partly due to the higher risk of the PV running out. I am not sure that I like the sound of Active Management. How can we know that we are being treated fairly?
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