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Post by chris on May 17, 2019 11:11:10 GMT
zlb - Hi. Unfortunately I'm not really qualified to respond and this is the kind of question that should be directed to the customer service desk, in part because I don't fully understand the question. As I understand it the Access Accounts are not like fractional reserve banking in that new money isn't created as a proportion of the amount deposited - a fraction of the account remains as liquid cash but the remainder is invested as a 1:1 ratio with lenders having direct ownership over their investments. Whilst the name may seem a decent fit based on the words used the mechanisms are entirely unrelated so it's likely confusing to people to conflate them.
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zlb
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Post by zlb on May 17, 2019 12:04:54 GMT
zlb - Hi. Unfortunately I'm not really qualified to respond and this is the kind of question that should be directed to the customer service desk, in part because I don't fully understand the question. As I understand it the Access Accounts are not like fractional reserve banking in that new money isn't created as a proportion of the amount deposited - a fraction of the account remains as liquid cash but the remainder is invested as a 1:1 ratio with lenders having direct ownership over their investments. Whilst the name may seem a decent fit based on the words used the mechanisms are entirely unrelated so it's likely confusing to people to conflate them. Thanks Chris, I've used metaphors raised in conversations about AC elsewhere on this board, where other contributors (to general DD and understanding) have tried to explain the model to others. The access accounts are talked about a lot. Thanks for clarifying the model. If Someone uses the Access Accounts, then, based on what you say, they are legally directly invested in all of the loans/borrowers? And that investor would have to wait for all defaults to repay? This explains why some have said they won't use the Access Accounts because one is invested in long term defaults. Is the provision fund for the Access Accounts only derived from investor deposits? Who would get their money first if there were a run on the accounts? Those in cash, or those in the Quick Access Account? What about those in the 30DAA? Thanks.
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Post by chris on May 17, 2019 12:37:02 GMT
zlb - I can only comment from a technical point of view, and in a personal capacity, so again feel the need to direct you to our customer service team if you'd like more detail - plus I'll try and keep this as simple as the somewhat complicated topic allows. The access account provision fund is funded by interest retained from the investments, so if a loan is paying 7% and a lender is being paid 4.1% for their cash, then the difference is retained in the provision fund. If a loan in the Access Accounts defaults then that loan only remains tradable within the accounts if the expected loss for that loan can be ring-fenced within the provision fund. So if a £1m loan is calculated to suffer a £200k loss, that £200k is set aside within the provision fund and the loan remains tradable within the AAs. Should the PF run out of funding for this purpose then holdings in loans where such ring-fencing cannot take place will be frozen for affected lenders, stopping that portion of the investment from being removed from the AAs until recovery is complete or the loss realised or the PF grows sufficiently to permit the ring-fencing. So new investors will only be invested into "long term defaults" if funds have already been ring-fenced in the PF to cover those expected losses. If there is a "run" of withdrawals on the accounts so that the liquidity buffer is depleted then withdrawal requests would be queued in the order in which they fall due. So QAA withdrawals would queue in the order requested, 30DAA withdrawals would be queued in the order they fall due after their 30 day notice period is up, with subsequent QAA withdrawals then being behind them in the queue. They'll be serviced as new deposits come into the account or loan units sell or principal is repaid. Cash on the platform is cash, ie. not invested and held as cash in the client money account. It will always be available. If that cash is swept into the QAA then it is no longer cash, it is invested as if it had been expressly transferred into the QAA and is subject to the same rules and queuing for withdrawals.
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sl75
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Post by sl75 on May 17, 2019 13:44:25 GMT
zlb - Hi. Unfortunately I'm not really qualified to respond and this is the kind of question that should be directed to the customer service desk, in part because I don't fully understand the question. As I understand it the Access Accounts are not like fractional reserve banking in that new money isn't created as a proportion of the amount deposited - a fraction of the account remains as liquid cash but the remainder is invested as a 1:1 ratio with lenders having direct ownership over their investments. Whilst the name may seem a decent fit based on the words used the mechanisms are entirely unrelated so it's likely confusing to people to conflate them. Alice has £100,000 in the bank.
Alice deposits this £100,000 in the QAA.
Bob gets a loan for £100,000 from AC. For illustration's sake, it is entirely funded from the QAA, using the same money Alice just deposited.
Bob pays the £100,000 to settle an outstanding invoice from his supplier, who happens to be Alice.
Alice has £100,000 in the QAA and £100,000 in the bank.
Alice withdraws £100,000 from the QAA to her bank account.
Alice now has £200,000 in the bank, whilst all other QAA investors still see the same balance in each of their accounts - most laymen would consider that they still have "the same amount of money" in the QAA.
As you can see, "money creation" occurs with the QAA (in normal market conditions) just as it does with a regular bank deposit account.
Alternatively, if Alice instead deposits the £100,000 she received from Bob into the QAA, and then AC uses this to fund a loan to Charlie, Charlie pays Alice (she's supplied a lot of people!), who deposits that, and AC use the funds to let Dave have a loan, etc...
Before long, Alice has £1,000,000 in the QAA, and yet only £100,000 of money has been moving around. Indeed, as AC do not currently enforce any minimum reserve requirement, the money can in principle be multiplied infinitely.
The main practical reason it doesn't is that very few suppliers will be depositing the money they receive into AC's QAA so in practice it doesn't have a tight circular loop to go round. The legal reason it doesn't is because the balance of the QAA isn't considered a form of "money"; it is merely convertible to money (in an average of 0 seconds) but only "in normal market conditions".
If AC did enforce (say) a 5% minimum reserve requirement, this would mean that when Alice deposited the original £100,000, they could only use £95,000 of that to form a loan to Bob (£5000 of Alice's money is then held as part of the cash reserve).
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Post by chris on May 17, 2019 14:00:53 GMT
sl75 - I believe your example is wrong in that Alice can only withdraw that £100k from the QAA if either the loan is repaid or someone else invests £100k to buy her loan unit. The 1:1 ratio is maintained at all times whereas it is not in fractional reserve banking. No new money is created as real money needs to be paid back into the system in order to realise the £100k she has invested in the QAA. As I understand it with fractional reserve banking that £100k being deposited could be credited to two different borrowers for £100k each, for example, predicated on the fact that only some of that £200k of debt will be withdrawn from the bank as cash at any one time. It's not a 1:1 ratio of deposited funds to lent funds as it is with the access accounts.
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sl75
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Post by sl75 on May 17, 2019 15:52:51 GMT
sl75 - I believe your example is wrong in that Alice can only withdraw that £100k from the QAA if either the loan is repaid or someone else invests £100k to buy her loan unit. The 1:1 ratio is maintained at all times whereas it is not in fractional reserve banking. No new money is created as real money needs to be paid back into the system in order to realise the £100k she has invested in the QAA. As I understand it with fractional reserve banking that £100k being deposited could be credited to two different borrowers for £100k each, for example, predicated on the fact that only some of that £200k of debt will be withdrawn from the bank as cash at any one time. It's not a 1:1 ratio of deposited funds to lent funds as it is with the access accounts.
As you say, the ability of Alice to withdraw the £100k is predicated on the fact that underlying reserves still exceed £100k despite Bob having already taken £100k out... in a larger context, Alice's £100k only formed a small proportion of the entire Access Account pool of almost £200M, of which over £20M is currently held as cash... and the £100k that formed Bob's loan is not directly identifiable as being "from" any specific investor (the system nominally allocates a pro-rata share to all investors).
The "money multiplier effect" occurs because all investors who hold the entire £200M of access account balance believe they can withdraw "their money" within the specified terms (0 seconds for QAA, and the specified number of days for 30DAA and 90DAA), but the system only really has a tiny fraction of that amount.
Although legally the balance of the Access Accounts is not money, in practice unsophisticated investors will treat it as money.
Undoubtedly the same was true of at least some early banks (before FSCS, inter-bank money markets, etc. and other measures that greatly mitigated the risk for ordinary investors...) - it was made clear that the "bank balance" was not money, but merely an amount of money the banker would pay to you, but the fact that money was always provided on demand meant everyone started treating it as though it was money... until the definition of "money" changed to include bank balances. At least some people understood that, as they would trigger a "run on the bank" any time they thought that the bank might no longer be able to honour its promise to pay money on demand... [Edit: something that possibly came as a surprise to the less sophisticated depositors to whom it may not have occured that the bank wasn't really keeping all their money in the vault]
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Post by chris on May 17, 2019 16:03:46 GMT
sl75 - I kinda see where you're coming from but still think you're missing an element. Alice can only withdraw her £100k if someone else buys her loan parts, which in the access account's case is what happens upon a withdrawal, where every other lender in those accounts buys that withdrawer's loan units. In which case she is no longer lending herself money (by proxy) but someone else is lending her that money. There is no creation of funds nor really the illusion of doing so unless people think they can keep lending themselves money somehow via the access accounts.
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sl75
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Post by sl75 on May 17, 2019 17:12:53 GMT
sl75 - I kinda see where you're coming from but still think you're missing an element. Alice can only withdraw her £100k if someone else buys her loan parts, which in the access account's case is what happens upon a withdrawal, where every other lender in those accounts buys that withdrawer's loan units. In which case she is no longer lending herself money (by proxy) but someone else is lending her that money. There is no creation of funds nor really the illusion of doing so unless people think they can keep lending themselves money somehow via the access accounts. As a nit-pick, as far as I can tell nobody specifically "buys" her loan parts (although I accept that's the legal fiction for regulatory purposes) - the system merely adjusts the denominator of the various calculations to make it appear as if everyone has a tiny fraction more of every loan in the system, so that if another snapshot is generated all investors' loan balances will appear to have changed (I'm sure there's a process that *can* generate a list of millions of transactions to get from one snapshot to another, but I'm also pretty sure it doesn't actually get run for every transaction!)
In any case, real banks don't create funds either - they just exchange one form of "funds" for another - if Bob goes to a real bank, Bob's promise to pay the bank £100k with interest is an asset that the bank can treat as a form of funds, and gets pooled with many other similar promises to pay, and in particular with any promises "to pay the bearer on demand" from the Bank of England, with the latter used to fulfil any promises to pay that the retail bank itself has issued and which are called upon. The bank (e.g. Barclays) will only hold a small fraction of actual cash and a further fraction of electronic money issued by the Bank of England, and uses this small fraction to actually perform any payments it is instructed to, expecting it to be replaced by other transactions in the other direction, or to be able to borrow on the money markets.
Similarly at AC, Bob's promise to pay various lenders an aggregate total of £100k is pooled with other similar promises to pay, and also some of Barclays' promises to pay according to AC's instruction on behalf of its clients. The fraction of the account held in Barclays' promises to pay allows AC to fulfil its (implied) promise to allow withdrawals from the QAA in "0 seconds", the 30DAA in 30 days and the 90DAA in 90 days. It also allows AC to fulfil the various promises made to borrowers presumably on behalf of as-yet unidentified clients to allow them to draw down further tranches at various future dates.
Just as a real bank would have issued far more promises to pay than it has resources to pay all at once, so the aggregate total of all AC's (implied) promises to pay people from the Access Accounts far exceed the total value of the account.
The main (and regulatorily important) difference is that Barclays retail deposit accounts have a practically unconditional promise to pay according to the account-holder's instruction, with money markets, emergency lending from the BoE, and the FSCS to back them up, whilst the implied promise to allow access to money on 0 seconds, 30 or 90 days' notice at AC are heavily caveated (e.g. "in normal market conditions"), and undoubtedly there are similar caveats in the agreements with borrowers up until the point funds are irrevocably allocated.
Otherwise, it seems to me the same process but at a different layer.
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Post by chris on May 18, 2019 8:21:26 GMT
sl75 - it's not synchronous but the transactions are generated behind the scenes, and you're right about the volume of them so for long term storage they're stored in a "compressed" form whereby the history can be computationally regenerated as needed. There are parallels from a certain limited point of view but there are significant differences, namely the 1:1 ratio that I think you keep ignoring. If you invest £100k in AC, even in the QAA, then we are explicit - you do not have £100k cash that you can take out. You have bought loan units and any liquidity is provided through participation in a marketplace where other people are buying and selling loan units. The access accounts add a layer on top of that whereby some of the investors funds are held as a cash reserve that facilitates the almost instant purchase of loan units when someone wishes to sell. This could be handled in a different way by maintaining a queue of people with funds waiting to enter the account, as occasionally happened when the accounts were smaller and the growth of the accounts, and therefore interest earned, was harder to fund from interest accrued by loan units held within a given month. When there is a queue of funds waiting to enter the account the cash buffer could be safely run down to zero and the "instant" access facility preserved. We've chosen to use the cash buffer as it provides a better experience for lenders when their funds are 100% invested from an interest paid point of view, moving the cash drag from the individual lender to the amount collectively paid into the PF which in turn is then reflected into the rate margin we operate the accounts at. None of that changes the 1:1 ratio between invested and lent funds nor mimics fractional reserve banking beyond outward similarity to access to your funds. AC have no contractual promises to allow lender withdrawals or to fund further advances to borrowers, and at no time will actual payouts ever exceed the amount deposited. We do not imply you will always be able to withdraw your funds regardless of demand, and all future draws are subject to lender liquidity and demand for those loan units. If we want to lend £1 then we have to have been given £1 to lend by a lender and we can never exceed that - fractional reserve banking does not follow that simple rule.
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zlb
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Post by zlb on May 18, 2019 8:43:44 GMT
zlb - I can only comment from a technical point of view, and in a personal capacity, so again feel the need to direct you to our customer service team if you'd like more detail - plus I'll try and keep this as simple as the somewhat complicated topic allows. The access account provision fund is funded by interest retained from the investments, so if a loan is paying 7% and a lender is being paid 4.1% for their cash, then the difference is retained in the provision fund. If a loan in the Access Accounts defaults then that loan only remains tradable within the accounts if the expected loss for that loan can be ring-fenced within the provision fund. So if a £1m loan is calculated to suffer a £200k loss, that £200k is set aside within the provision fund and the loan remains tradable within the AAs. Should the PF run out of funding for this purpose then holdings in loans where such ring-fencing cannot take place will be frozen for affected lenders, stopping that portion of the investment from being removed from the AAs until recovery is complete or the loss realised or the PF grows sufficiently to permit the ring-fencing. So new investors will only be invested into "long term defaults" if funds have already been ring-fenced in the PF to cover those expected losses. If there is a "run" of withdrawals on the accounts so that the liquidity buffer is depleted then withdrawal requests would be queued in the order in which they fall due. So QAA withdrawals would queue in the order requested, 30DAA withdrawals would be queued in the order they fall due after their 30 day notice period is up, with subsequent QAA withdrawals then being behind them in the queue. They'll be serviced as new deposits come into the account or loan units sell or principal is repaid. Cash on the platform is cash, ie. not invested and held as cash in the client money account. It will always be available. If that cash is swept into the QAA then it is no longer cash, it is invested as if it had been expressly transferred into the QAA and is subject to the same rules and queuing for withdrawals. Thanks Chris, I think this estimation of loss (e.g. your example here of £200k) and then still retaining the defaulted loan within the AAs is what has alarmed some people where they've moved money around and found it invested in defaulted loans. E.g. I remember reading a post by mary (no obligation to engage, may or may not find this of interest), and someone else, which have caused me to wonder. I think this conversation is valuable in that it goes further than others about the AAs. I prefer a public conversation because often, as an individual, one can be brushed off with smooth-sounding platitudes (I'm not implicating AC in this as your communication is clear, but it's what I've found with some others). Also I think I'm asking questions which will be of value to others. Thank you sl75 for knowledge.
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Post by chris on May 18, 2019 13:18:54 GMT
zlb - it's a necessity of providing a liquid account, otherwise anyone in an access account could be locked in at any point were an underlying loan to go bad even with the PF being well funded. There are layers at play though, with the underlying security, ring fenced provision fund, additional funds within the provision fund beyond the ring fenced amount, future payments into the provision fund (i.e. as other loans continue to perform), plus any other recovery efforts such as legal cases, etc. But as with any investment it is possible for things to go wrong and for investors / lenders to lose money. You are putting your capital at risk in order to earn a return, and only you can decide if you're comfortable with that and if the level of return is sufficient for the level of risk.
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zlb
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Post by zlb on May 18, 2019 21:20:05 GMT
zlb - it's a necessity of providing a liquid account, otherwise anyone in an access account could be locked in at any point were an underlying loan to go bad even with the PF being well funded. There are layers at play though, with the underlying security, ring fenced provision fund, additional funds within the provision fund beyond the ring fenced amount, future payments into the provision fund (i.e. as other loans continue to perform), plus any other recovery efforts such as legal cases, etc. But as with any investment it is possible for things to go wrong and for investors / lenders to lose money. You are putting your capital at risk in order to earn a return, and only you can decide if you're comfortable with that and if the level of return is sufficient for the level of risk. thanks Chris.
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sl75
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Post by sl75 on May 19, 2019 18:39:29 GMT
... sl75 If you invest £100k in AC, even in the QAA, then we are explicit - you do not have £100k cash that you can take out... ... AC have no contractual promises to allow lender withdrawals ... We do not imply you will always be able to withdraw your funds regardless of demand. I fully recognise that this is the official line, but in practice I'd bet that many customers do infer that they can in fact withdraw the entire balance of funds invested in the QAA as required, and the 30DAA/90DAA on the specified notice.
AC's own "invest idle funds" function relies on this, and the marketing focuses on the access time in normal market conditions without explicitly stating that even the QAA funds could potentially be inaccessible to the investor for several years, so it depends on the sophistication of individual investors as to how much they really understood of what the "in normal market conditions" disclaimers really meant.
If we want to lend £1 then we have to have been given £1 to lend by a lender and we can never exceed that - fractional reserve banking does not follow that simple rule. Again, this seems to me to be conflating two separate aspects of modern banking - one being that they only keep a fractional cash reserve to support withdrawals that would normally be able to be processed instantly (just as AC does), and the other that a regulated bank has the right to have its own promises to pay considered as a form of money. At no point am I claiming the latter about AC.
Scaling down to a personal level, if my friend has no means of payment on him, and I promise to pay for his meal or similar in exchange for him promising to pay me back next week, that's a simple exchange of promises to pay. The restaurant will expect me to honour my promise to pay before I leave the premises, providing them with something they consider a form of money (e.g. a "promise to pay the bearer on demand" issued by the BoE, or an electronic promise to pay issued by a credit or debit card service provider).
Anyone can of course create their own "promises to pay" in unlimited quantities with appropriate conditions attached (the beggar on the street could promise to pay me £1,000,000 next week when he's won the lottery...), but if they aren't perceived to have the means to honour those promises, or there is otherwise not good reason to believe they will in fact honour them, nobody will accept them. Only bank-issued promises to pay are widely considered a form of money, which gives banks the power to "create" an unlimited quantity of money for as long as society continues to recognise that bank's promise as a form of money... which is why they need to be much more tightly regulated.
As you say, the only balance within AC that is considered a form of "money" is the balance of the client account. In practice, however, I bet that many of the less sophisicated customers do indeed consider at least the balance of the "cash account" and the "awaiting investment" balances of the other accounts as a form of "money", even when they've got the "invest idle funds" option switched on, especially because AC do not display the (rather lower) actual amount of money held on my behalf in the client account anywhere (even though they must surely know it at any given moment for regulatory reasons).
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TitoPuente
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Post by TitoPuente on Feb 19, 2020 8:37:22 GMT
From the Show More language in the 30 DAA box:
"It has a target interest rate return for investors of 5.10% gross per annum capped (this can vary regularly and the current rate will be announced at the start of each month but will not fall below 4.00% p.a.)"
Where can I find the monthly announced rate? Is this the small print below the account title? Is it updated every month?
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ceejay
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Post by ceejay on Feb 19, 2020 10:14:15 GMT
From the Show More language in the 30 DAA box: "It has a target interest rate return for investors of 5.10% gross per annum capped (this can vary regularly and the current rate will be announced at the start of each month but will not fall below 4.00% p.a.)" Where can I find the monthly announced rate? Is this the small print below the account title? Is it updated every month? AFAIK it has never actually changed - they are just reserving the right to do so if they want.
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