webwiz
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Post by webwiz on Nov 2, 2014 18:32:49 GMT
The banks need a reserve not only for defaults but for a run on the bank, as they borrow short and lend long. Only a proportion of the reserve should be required for bad debts. I don't think that the BoE expects losses to get anywhere near 4.95% of assets, it is more a question of liquidity.
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Post by johnny on Nov 7, 2014 15:45:08 GMT
The banks need a reserve not only for defaults but for a run on the bank, as they borrow short and lend long. Only a proportion of the reserve should be required for bad debts. I don't think that the BoE expects losses to get anywhere near 4.95% of assets, it is more a question of liquidity. I totally agree with you, some observers are asking for a far greater firewall of up to 10% to guard against liquidity and another bank run. The point I was making is that nobody would be unhappy to see a larger provision fund and now is the best time to ensure its up to the job. As I have stated I am more than comfortable with the coverage which at present is about 3.7% of the loan book. The test to the provision fund is not that it has enough in a very severe economic downturn but it is still substantial after its been needed. This would help prevent what I perceive a real threat which is Lenders panicking and withdrawing on top of higher defaults.
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Post by davee39 on Nov 7, 2014 17:03:44 GMT
Not really.
Banks lend money they don't have, so the liquidity requirement means that they need to have 10% of total lending available so they can pretend they are solvent when a queue forms round the block. As Northern Rock/Icesave proved though, the more a Bank claims to be safe, the bigger the queue to get out.
RS has only loaned money it has got, so its ratio should be 100%, meaning all money will be there when it is wanted. Realizing investments is a different problem since if there are no buyers for loans they would have to be held to maturity.
When a loan made by a bank defaults the cost is taken against the Banks profits, the provision fund is closer to this since it is actually made of money which could either have given Lenders higher rates, or Borrowers lower rates, so the cost might still be seen as coming out of theoretical lender profit.
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Post by GSV3MIaC on Nov 7, 2014 18:29:04 GMT
Interesting to speculate what would happen if lots of RS or Zopa lenders wanted to cash out early, and nobody wanted in. With FC it is obvious that you need a buyer, but less so with the two I mentioned - do the RS T&Cs actually say that maybe you can't get out early at any price?
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pikestaff
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Post by pikestaff on Nov 7, 2014 21:13:46 GMT
Interesting to speculate what would happen if lots of RS or Zopa lenders wanted to cash out early, and nobody wanted in. With FC it is obvious that you need a buyer, but less so with the two I mentioned - do the RS T&Cs actually say that maybe you can't get out early at any price? Yes they do, albeit they don't exactly shout about it: 8. Acceptance of Loans
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2. In the case of an offer to lend, once your offer has been accepted you will not be given the opportunity to change the Loan Contract made by that acceptance. You will not be allowed to withdraw from that loan unless you use the Sell-Out function.
3. The "Sell-Out" function allows a Lender to sell their Loan Contract provided there is a new Lender available to match their existing Loan Contract. The Sell-Out function is available as an option in the Lender's Account.
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Post by westonkevRS on Dec 21, 2014 9:31:33 GMT
Anyway, through the year I had been hoping to get to a Provision Fund of £10m, and we've got there. It does get harder to grow it with such pace as H1 2014 because as the outstandings get bigger naturally the bad debts are relatively larger.
But £20m (or more) for Christmas 2015?
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Post by p2plender on Dec 21, 2014 18:13:43 GMT
let us hope... I feel strong headwinds 2015 mind......
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Post by moneyball on Dec 21, 2014 20:11:52 GMT
let us hope... I feel strong headwinds 2015 mind...... Lighter or stronger headwinds then when we went into 2008? Personally, I feel relatively comfortable with regards to RateSetter specifically but in general... I share a similar view.
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Post by p2procks on Feb 10, 2015 13:01:39 GMT
I have been lending in 3M and 1Y market in order to get a sense of how the platform works before getting locked-up on larger amount of money for a longer time. My 3M lending activity assumes I am paid back in 3 months, though borrowers cannot borrow for that term, hence it implies that I am being paid back if and when someone else come to refinance the loan. What happens if no-one steps in 3 months from now (no liquidity or rate paid by borrower much lower than then current rates for example)? Will the Provision Fund step in and is it considered a default, even though the borrower is not in default?
If the loan book grows to £1Bn+ this year do we rely more and more on refinancing? I am a bit worried about the terms not matching on the borrower side and lender side. This would indeed be similar to a bank run, to the extent that if defaults start to kick-in and less money flows in then lenders won't have their principal back on schedule.
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adrianc
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Post by adrianc on Feb 10, 2015 14:51:45 GMT
I have been lending in 3M and 1Y market in order to get a sense of how the platform works before getting locked-up on larger amount of money for a longer time. My 3M lending activity assumes I am paid back in 3 months, though borrowers cannot borrow for that term, hence it implies that I am being paid back if and when someone else come to refinance the loan. What happens if no-one steps in 3 months from now Three month market? Do you mean one month? To make it a bit clearer, have a read of this thread -> p2pindependentforum.com/thread/1134/demand-side-monthly-access
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Post by p2procks on Feb 10, 2015 16:01:32 GMT
Apologies meant 1M indeed. Went through that post, 5 pages worth of it this is substantial! So it seems Provision Fund does not cover liquidity shortfall if no-one refinances the loan when it comes to term, and loan would just extend until it expires on the borrower side. Problem is, I have no idea of the term on the borrower side. If BOE hikes rates next month, no one will want to lend at my current rate, and borrower won't want to prepay his loan as he got offered a nice short term rate, so will be stuck with low yielding loan for a longer term. Seems am way better off lending in 1Y market and have matching term on borrower side
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Post by davee39 on Feb 10, 2015 17:16:43 GMT
Apologies meant 1M indeed. Went through that post, 5 pages worth of it this is substantial! So it seems Provision Fund does not cover liquidity shortfall if no-one refinances the loan when it comes to term, and loan would just extend until it expires on the borrower side. Problem is, I have no idea of the term on the borrower side. If BOE hikes rates next month, no one will want to lend at my current rate, and borrower won't want to prepay his loan as he got offered a nice short term rate, so will be stuck with low yielding loan for a longer term. Seems am way better off lending in 1Y market and have matching term on borrower side You're worried about a possible rate hike next month?, REALLY? You are best off lending in whichever market makes you feel most comfortable without worrying too much about monthly liquidity. As for a rate hike, not before 2018 unless common sense reigns in Europe, Greece, Spain, Italy and a few fag ends leave the Euro and then we see some proper growth.
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jonbvn
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Post by jonbvn on Feb 10, 2015 18:21:00 GMT
If BOE hikes rates next month... Of course the risk is always there. However, with current inflation/deflation do you really see it as feasible short term? Anyway "You pays your money......."
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bigfoot12
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Post by bigfoot12 on Feb 10, 2015 18:51:42 GMT
If BOE hikes rates next month, no one will want to lend at my current rate, and borrower won't want to prepay his loan as he got offered a nice short term rate, so will be stuck with low yielding loan for a longer term. Seems am way better off lending in 1Y market and have matching term on borrower side I think that if you want certainty then the 1Y market is better, but even then I think that loans longer than 1Y are made using 1 year loans. Having said that I don't think it matters what the prevailing rate is. Imagine UKIP win in May and we exit the Euro and the BoE hikes rates to defend sterling. [Insert you choice of scenario.] If short rates are then 6% I think that you will still be okay as long as there is some activity. Ratesetter will lose money on the longer loans they made but you should be okay. The interesting question is under what circumstance can RS not roll over? I agree it is all a bit vague. I've stopped lending in 1 month and 1 year markets on Ratesetter as I don't fully understand it. Maybe westonkevRS can illuminate things a little (or point to some previous post).
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Post by westonkevRS on Feb 10, 2015 20:26:11 GMT
I'd love to illuminate, but unsure of the question!
RateSetter cannot "lose money" on the longer term loans (3, 4 and 5 year loans) other than losing a fee element on loans that close due to early repayment or default. It is possible that RateSetter could face a finance cost on shorter term loans if the rates increased substantially between the loan agreed rate and money to fulfil. But this is an actively managed risk, and changes are made constantly to avoid this risk by the finance team.
In terms of money rolling over, the theory is that there will be new money waiting to fill the shoes of money departing, or loans finances by monthly money ending and therefore old/new money being available. There is a risk of new monthly money not being available (e.g. a run on the bank), but with the market structure the increase in rates should draw new money in and in extremity the T&Cs do allow a lock-in. This has never been needed in 5 years of trading to date, and in extremity would only be a short term measure.
Kevin.
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