webwiz
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Post by webwiz on Sept 17, 2015 7:32:18 GMT
Is the benefit of QAA merely better liquidity or have measures also been taken to mitigate risk compared to the other accounts? I suspect that most investors in it have assumed the latter on the basis that the interest rate is so much lower and the mantra is "The higher the rate the higher the risk". Now obviously there must still be some risk so AC cannot advertise it as risk free. But it would be helpful if they could give some indication of the degree of risk relative to their other accounts. If there is no difference then their overfunded problem might disappear rapidly!
£10000 in QAA returns the same as £3750 in MLIA (at 10%) or £5357 in GBBA/GEIA. What are the risk profiles of these three ways of getting £375pa?
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bigfoot12
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Post by bigfoot12 on Sept 17, 2015 7:41:10 GMT
Is the benefit of QAA merely better liquidity or have measures also been taken to mitigate risk compared to the other accounts? I suspect that most investors in it have assumed the latter on the basis that the interest rate is so much lower and the mantra is "The higher the rate the higher the risk". Now obviously there must still be some risk so AC cannot advertise it as risk free. But it would be helpful if they could give some indication of the degree of risk relative to their other accounts. If there is no difference then their overfunded problem might disappear rapidly! £10000 in QAA returns the same as £3750 in MLIA (at 10%) or £5357 in GBBA/GEIA. What are the risk profiles of these three ways of getting £375? I think that the risk is meant to be similar to the other provision fund accounts. I think that it is the same provision fund that covers all three, but how it is allocated I'm not sure. Liquidity also has a price, ask Lehman Brothers, and I think the lower yield on the QAA is almost entirely due to its almost instant access in (normal market conditions). The automatic sweep also makes it convenient. I wouldn't want to rely on it if I might really need the money at short notice, but for me the worst case is missing out on a new loan part (even if they are rare) so I am happy.
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webwiz
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Post by webwiz on Sept 18, 2015 11:21:09 GMT
That raises the question of how any loss not covered by the PF would be shared out among the investors. With money constantly churning in and out of the QAA.
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bigfoot12
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Post by bigfoot12 on Sept 18, 2015 13:06:30 GMT
That raises the question of how any loss not covered by the PF would be shared out among the investors. With money constantly churning in and out of the QAA. At the moment it seems to be the last one to withdraw gets stuck with the whole loss, unless AC notice first and suspend further withdrawals.
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am
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Post by am on Sept 18, 2015 14:30:19 GMT
As I understand a high proportion of the QAA is held as cash. As far as I can see that should lower the risk, provided that the non-cash element is adequately diversified.
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Post by stuartassetzcapital on Sept 18, 2015 16:40:59 GMT
As I understand a high proportion of the QAA is held as cash. As far as I can see that should lower the risk, provided that the non-cash element is adequately diversified. Indeed - if the account is provision fund protected, only partly invested in liquid loans and has a very high cash balance available to it representing the majority of the account then that puts it at a lower risk level than another investment account that for example is fully invested or the MLIA which also has no provision fund
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webwiz
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Post by webwiz on Sept 18, 2015 16:41:56 GMT
As I understand a high proportion of the QAA is held as cash. As far as I can see that should lower the risk, provided that the non-cash element is adequately diversified. Suppose, for the sake of argument, that the QAA stays at £1m because there is a queue waiting to get in. Then one of the loans in it defaults. Will it replace that loan with cash from the queue? What if there is not enough? Even if there is enough the cash:loan ration would be increased and AC would be losing money. It is almost inevitable that sooner or later a loan in the QAA will default and somebody has to take the hit. AC should spell out exactly how the loss will be shared out.
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Post by stuartassetzcapital on Sept 18, 2015 16:52:40 GMT
As I understand a high proportion of the QAA is held as cash. As far as I can see that should lower the risk, provided that the non-cash element is adequately diversified. Suppose, for the sake of argument, that the QAA stays at £1m because there is a queue waiting to get in. Then one of the loans in it defaults. Will it replace that loan with cash from the queue? What if there is not enough? Even if there is enough the cash:loan ration would be increased and AC would be losing money. It is almost inevitable that sooner or later a loan in the QAA will default and somebody has to take the hit. AC should spell out exactly how the loss will be shared out. Specifically, no - a defaulted loan stays in the account till collected out in full/ otherwise. It isnt replaced with cash from the queue. the software aims to distribute all loans across all investors so everyone would have a sum tied up in that loan and as a hopefully small fraction of the account that should not be too inconvenient and then if there is a shortfall upon final collection through the security the loss would ideally be made up from the provision fund. So I disagree that it follows that everyone/ someone takes a hit just because we have a default - we are a secured lender after all and losses are the real issue not defaults. On a wider point, the provision fund target size of 5% is circa 5 times our expected annual loss and is also topped up each month. We are not regulated to run managed funds where a prescribed and managed proceeds distribution process can be controlled by us centrally but instead are just licensed for Section 36(H) loan agency and all our IT must be compliant with that. What you are asking for seems on careful consideration of some recent threads to be a bank account type pooling of risk and going that far does not currently look possible in this iteration. It appears to be a choice for you and indeed all QAA lenders of 1% plus in a savings account or 3.75% and to decide whether some remote black-swan related matters make that unattractive or worth having. Sorry I can't give you the answer you seek yet but we won't be forgetting your question and will continue work on this.
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webwiz
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Post by webwiz on Sept 18, 2015 17:44:30 GMT
Suppose, for the sake of argument, that the QAA stays at £1m because there is a queue waiting to get in. Then one of the loans in it defaults. Will it replace that loan with cash from the queue? What if there is not enough? Even if there is enough the cash:loan ration would be increased and AC would be losing money. It is almost inevitable that sooner or later a loan in the QAA will default and somebody has to take the hit. AC should spell out exactly how the loss will be shared out. Specifically, no - a defaulted loan stays in the account till collected out in full/ otherwise. It isnt replaced with cash from the queue. the software aims to distribute all loans across all investors so everyone would have a sum tied up in that loan and as a hopefully small fraction of the account that should not be too inconvenient and then if there is a shortfall upon final collection through the security the loss would ideally be made up from the provision fund. So I disagree that it follows that everyone/ someone takes a hit just because we have a default - we are a secured lender after all and losses are the real issue not defaults. On a wider point, the provision fund target size of 5% is circa 5 times our expected annual loss and is also topped up each month. We are not regulated to run managed funds where a prescribed and managed proceeds distribution process can be controlled by us centrally but instead are just licensed for Section 36(H) loan agency and all our IT must be compliant with that. What you are asking for seems on careful consideration of some recent threads to be a bank account type pooling of risk and going that far does not currently look possible in this iteration. It appears to be a choice for you and indeed all QAA lenders of 1% plus in a savings account or 3.75% and to decide whether some remote black-swan related matters make that unattractive or worth having. Sorry I can't give you the answer you seek yet but we won't be forgetting your question and will continue work on this. OK I should have said "a loss in excess of what the PF can make up" instead of "default" but I thought that was clear. If you think this is as rare as a black swan I wonder where you were in 2008. I don't mind taking on a degree of risk to get 3.75% but it appears that even you do not know who would take the hit in such an event, that you consider unlikely but which can not be ruled out. Plenty of people thought that Lehman could not go bust. Then there is the risk of a faulty valuation for whatever reason. All I am asking is how the loss will be allocated amongst the lenders.
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bigfoot12
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Post by bigfoot12 on Sept 18, 2015 18:12:07 GMT
OK I should have said "a loss in excess of what the PF can make up" instead of "default" but I thought that was clear. If you think this is as rare as a black swan I wonder where you were in 2008. I don't mind taking on a degree of risk to get 3.75% but it appears that even you do not know who would take the hit in such an event, that you consider unlikely but which can not be ruled out. Plenty of people thought that Lehman could not go bust. Then there is the risk of a faulty valuation for whatever reason. All I am asking is how the loss will be allocated amongst the lenders. Not even a "loss", but what about "loan suspensions totalling" ... At the moment there is a severe shortage of loans, this has happened before. Also there has been a time when there were lots of loans and it seemed, at the time, there was no spare cash. And stuartassetzcapital I think that the point about black swans is that they are more common than you expect.
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Post by stuartassetzcapital on Sept 19, 2015 13:00:29 GMT
Specifically, no - a defaulted loan stays in the account till collected out in full/ otherwise. It isnt replaced with cash from the queue. the software aims to distribute all loans across all investors so everyone would have a sum tied up in that loan and as a hopefully small fraction of the account that should not be too inconvenient and then if there is a shortfall upon final collection through the security the loss would ideally be made up from the provision fund. So I disagree that it follows that everyone/ someone takes a hit just because we have a default - we are a secured lender after all and losses are the real issue not defaults. On a wider point, the provision fund target size of 5% is circa 5 times our expected annual loss and is also topped up each month. We are not regulated to run managed funds where a prescribed and managed proceeds distribution process can be controlled by us centrally but instead are just licensed for Section 36(H) loan agency and all our IT must be compliant with that. What you are asking for seems on careful consideration of some recent threads to be a bank account type pooling of risk and going that far does not currently look possible in this iteration. It appears to be a choice for you and indeed all QAA lenders of 1% plus in a savings account or 3.75% and to decide whether some remote black-swan related matters make that unattractive or worth having. Sorry I can't give you the answer you seek yet but we won't be forgetting your question and will continue work on this. OK I should have said "a loss in excess of what the PF can make up" instead of "default" but I thought that was clear. If you think this is as rare as a black swan I wonder where you were in 2008. I don't mind taking on a degree of risk to get 3.75% but it appears that even you do not know who would take the hit in such an event, that you consider unlikely but which can not be ruled out. Plenty of people thought that Lehman could not go bust. Then there is the risk of a faulty valuation for whatever reason. All I am asking is how the loss will be allocated amongst the lenders. Banks have c 3-5% equity / first loss position and after that it is the taxpayer who did (but may not again) bail them out. Our normal provision fund is greater at 5% and we will look to increase this in the future whereas the banks are fighting any increase in their capital requirements. Black swan events can happen but given our loans (unlike many unsecured business and consumer loans) are all secured and have an average c65% LTV so there is a long way to go (35% loss) before even the provision fund 5% is called on. P2P lending isn't cast iron and is an investment not a savings account but you rightly even question the safety of savings accounts too. We will do our best to deliver what it says on the tin.
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Post by profunder on Sept 19, 2015 13:49:30 GMT
Banks have c 3-5% equity / first loss position and after that it is the taxpayer who did (but may not again) bail them out. I guess you are not up to date, should a globally important financial institution fail it is written into law there will be a bail in. What this means is the unsecured creditors (i.e. the bank account holders) would all lose money instead of the government. This was signed of and agreed with the USA and EU and is now law. If a smaller bank fails then the government would protect deposits. But on wikipedia this would mean that the following banks failing would see depositors balances reduced instead. This would include non-invested money in your accounts at all the P2P providers as they are Barclays client accounts. - HSBC
- Barclays
- Nationwide
- Standard Chartered Bank
- Lloyds
- Santander
- RBS
- Coop
Source: en.wikipedia.org/wiki/List_of_systemically_important_banks
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jonah
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Post by jonah on Sept 19, 2015 14:47:21 GMT
Also (whilst not 100% sure that it is the same thing) the tier 1 capital ratio for several major UK banks is now 11%+ and rising. This isn't helping their profits, but in theory is reducing risk (or more precisely the impact if it does go pop).
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Post by stuartassetzcapital on Sept 19, 2015 15:00:52 GMT
Banks have c 3-5% equity / first loss position and after that it is the taxpayer who did (but may not again) bail them out. I guess you are not up to date, should a globally important financial institution fail it is written into law there will be a bail in. What this means is the unsecured creditors (i.e. the bank account holders) would all lose money instead of the government. This was signed of and agreed with the USA and EU and is now law. If a smaller bank fails then the government would protect deposits. But on wikipedia this would mean that the following banks failing would see depositors balances reduced instead. This would include non-invested money in your accounts at all the P2P providers as they are Barclays client accounts. - HSBC
- Barclays
- Nationwide
- Standard Chartered Bank
- Lloyds
- Santander
- RBS
- Coop
Source: en.wikipedia.org/wiki/List_of_systemically_important_banksNice theory to give consumer confidence yes as without it banks would not have the public confidence. Not being funny but in the real world if depositors started to lose cash with write-offs then the run on the banks (eg Northern Rock when a loss was expected to be possible but hadn't actually happened yet), where they are c 97% based on debt, would be horrific and cause the banks to fail which in turn would cause the economy to instantly fail too. Not an option so its just an 'emperor's clothes' story in my view and the government (ie taxpayer) would step in again and lets face it that's what happened last time and nothing material has changed. P2P is about trying to find a new way.
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Post by stuartassetzcapital on Sept 19, 2015 15:10:15 GMT
And interesting point about cash with our Barclays Client Account - in a total banking failure yes some of that or all might be lost but in theory is protected by FSCS to the relevant current limit unless a client banks elsewhere with Barclays in which case the limit applies to total deposits in all accounts with them. If all of an AC investor's cash was in loans then there would be no deposits to be protected and you would have the realisable security of each loan instead as protection.
It's a difficult paradigm that there is no certainty in this world and the recent near global financial meltdown was a wakeup call that even banks, countries and Governments are not safe.
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