locutus
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Post by locutus on Nov 24, 2015 10:09:26 GMT
Just to be clear, all the talk about getting locked into the monthly market if the SHTF results only in liquidity risk. i.e. I thought I was lending for a month but I can't get my money back for 60 months.
The most important point is that as loan contracts are directly with borrowers, it should have no effect on capital risk. Even though you may be locked in for 60 months, you will get your money plus some interest back.
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Post by Deleted on Nov 24, 2015 10:16:20 GMT
Just to be clear, all the talk about getting locked into the monthly market if the SHTF results only in liquidity risk. i.e. I thought I was lending for a month but I can't get my money back for 60 months. The most important point is that as loan contracts are directly with borrowers, it should have no effect on capital risk. Even though you may be locked in for 60 months, you will get your money plus some interest back. So why are 5 year rates substantially higher than monthly rates, if your theory is that the risk is identical?
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Post by Deleted on Nov 24, 2015 10:25:55 GMT
After all, it should be pretty evident that the risk of a life-changing event that causes creditworthiness to detoriate (loss of job, ill health, etc) is SUBSTANTIALLY higher over a 60 month period than a 1 month period.
RateSetter have essentially taken out the option with their Terms and Conditions of dumping this increased risk onto monthly lenders if they have a duration mismatch, while still paying them a return commensurate with a low-risk monthly loan.
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locutus
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Post by locutus on Nov 24, 2015 10:26:46 GMT
Just to be clear, all the talk about getting locked into the monthly market if the SHTF results only in liquidity risk. i.e. I thought I was lending for a month but I can't get my money back for 60 months. The most important point is that as loan contracts are directly with borrowers, it should have no effect on capital risk. Even though you may be locked in for 60 months, you will get your money plus some interest back. So why are 5 year rates substantially higher than monthly rates, if your theory is that the risk is identical? I don't think the risk is identical. I was referring to the fact that people lending in the monthly markets may not get their cash back for up to 60 months if there is a liquidity event. Lending for 5 years is obviously riskier than lending for 1 month. The reason that rates for 5 year are higher is because RS is obfuscating the fact that money lent in the monthly market is actually used to finance the other markets. If they were transparent and lenders were more sophisticated, the difference would be much less.
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Post by Deleted on Nov 24, 2015 10:28:22 GMT
And lets not forget that fact that a monthly loan is betting that RateSetter itself and the Provision Fund will still be up and running in a month as insurance.
A very different proposition to betting that Ratesetter and the Provision Fund will still be up and running in 5 years...
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locutus
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Post by locutus on Nov 24, 2015 10:30:20 GMT
RateSetter have essentially taken out the option with their Terms and Conditions of dumping this increased risk onto monthly lenders if they have a duration mismatch, while still paying them a return commensurate with a low-risk monthly loan. This is the key point. It doesn't feel right to me but until someone raises it with the FCA, not much will change.
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Post by Deleted on Nov 24, 2015 10:36:18 GMT
Yep. I also like pip's point about a monthly liquidity crunch being a serious reputational (and therefore existential risk) to RateSetter itself.
RateSetters marketing prides itself on 'everyone getting their money back'. Although a liquidity crunch in the monthly market is *technically* not a default, I'm not sure that would do much good if the headlines were reporting that monthly lenders were being forced to wait months or even YEARS to be repaid on a 1 month loan.
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bigfoot12
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Post by bigfoot12 on Nov 24, 2015 11:46:04 GMT
I broadly agree with pip about the cryptic nature of the monthly market (though I'd be amazed if there is any cross-subsidy of other markets). There is a small but intederminate amount of liquidity risk. Until a panic happens, we won't know how robust RS's defences (such as backstop liquidity providers) are. The defences will be finite so they could run out. If the panic is justified we are probably headed for a Resolution Event (and the end of RS) anyway. I don't think that there is an explicit cross subsidy, but without this, monthly rates might be lower and other rates higher? i.e. it has a normal market impact. Just to be clear, all the talk about getting locked into the monthly market if the SHTF results only in liquidity risk. i.e. I thought I was lending for a month but I can't get my money back for 60 months. The most important point is that as loan contracts are directly with borrowers, it should have no effect on capital risk. Even though you may be locked in for 60 months, you will get your money plus some interest back. I tend to agree more with pikestaff . If there wasn't enough monthly money today, rates would climb. If they got to 6% I might transfer some money in. If they went to 9% I would transfer some more. Others would do the same. So the issue is likely to be what is it that is preventing or at least reducing our inclination to deposit more money. Most likely is some concern about RS. RateSetter have essentially taken out the option with their Terms and Conditions of dumping this increased risk onto monthly lenders if they have a duration mismatch, while still paying them a return commensurate with a low-risk monthly loan. This is the key point. It doesn't feel right to me but until someone raises it with the FCA, not much will change. I don't think anyone is dumping anything. It is in the terms and conditions and on the FAQ. I don't see why the FCA need to be involved. If you don't like it don't lend through RS, or as I do, confine yourself to the longer loans.
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Post by Deleted on Nov 24, 2015 11:55:40 GMT
I don't think anyone is dumping anything. It is in the terms and conditions and on the FAQ. I don't see why the FCA need to be involved. If you don't like it don't lend through RS, or as I do, confine yourself to the longer loans. Because this an FCA regulated business? And this kind of 'maturity transformation', to use the relevant industry jargon, is exactly the kind of thing that leads to runs on banks. Northern Rock suffered from pretty much exactly this problem - borrow short, lend long, and then a short-term rate or liquidity shock leads to problems. Except in this case, RateSetter is transferring the risk onto monthly lenders via in the Terms and Conditions. Interestingly, a couple of articles I've read in the last few months have mentioned this exact point about maturity transformation in the P2P space.
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Post by Deleted on Nov 24, 2015 12:02:12 GMT
I tend to agree more with pikestaff . If there wasn't enough monthly money today, rates would climb. If they got to 6% I might transfer some money in. If they went to 9% I would transfer some more. Others would do the same. So the issue is likely to be what is it that is preventing or at least reducing our inclination to deposit more money. Most likely is some concern about RS. Can you see that this is very problematic too though, if the loan is long term and fixed rate, and is being financed via short-term rates which spike. Again, pretty much exactly what happened to Northern Rock.
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bigfoot12
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Post by bigfoot12 on Nov 24, 2015 13:49:26 GMT
I tend to agree more with pikestaff . If there wasn't enough monthly money today, rates would climb. If they got to 6% I might transfer some money in. If they went to 9% I would transfer some more. Others would do the same. So the issue is likely to be what is it that is preventing or at least reducing our inclination to deposit more money. Most likely is some concern about RS. Can you see that this is very problematic too though, if the loan is long term and fixed rate, and is being financed via short-term rates which spike. Again, pretty much exactly what happened to Northern Rock. But Northern Rock told their customers that they could have their money back at any time. RS have told us that we can have our money back in times of normal liquidity (which it always has been so far). I repeat that I am not lending in the one month market, but I do lend for longer terms.
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registerme
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Post by registerme on Nov 24, 2015 13:54:52 GMT
We, here, understand that (and as a result I will no longer be putting anything other than shrapnel on the monthly market), but I wonder how many other RateSetter customers realise that they are exposed to this risk?
It also remains clear as mud to me how the monthly market relates to longer term markets. Either I'm lending to a borrower for a month, or I'm not. If I am not, and my monthly loans are actually being worked up to meet longer term demand then some function, presumably RateSetter, is munging funds around. And if that's the case I am no longer setting the rate.
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Post by Deleted on Nov 24, 2015 14:08:29 GMT
And if 'normal liquidity' ceases, the risk is borne by the monthly lenders, via RateSetters Terms and Conditions... even though it is RateSetter who are effectively acting as a bank in this case, lending long-term and financing short-term. RateSetter basically have the embedded option to unload long-term loans onto monthly lenders at short-term rates. This is a *massive* risk transfer. But like I said, a bit more reading has indicated that regulators like the FCA *ARE* starting to notice this sort of thing. Good. www.altfi.com/article/1455_is_peer_to_peer_lending_set_to_be_the_next_big_financial_services_scandal"... perceives a transition within the peer-to-peer lending space, with the platforms beginning to offer “packages” to investors, rather than direct loan contracts. “At that point,” said the FCA Chairman, “they become awfully like a bank..."
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Post by Deleted on Nov 24, 2015 14:15:55 GMT
Also, I would love to hear a concrete definition of 'normal liquidity'.
For example, what if there are short-term rates available, but at higher levels that would cause RateSetter to take a loss on financing their long-term loan book... would that still constitute 'normal liquidity'? Or will RateSetter, rather than take a loss, exercise their embedded option to force the entire long-term loan onto the monthly lenders??
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registerme
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Post by registerme on Nov 24, 2015 14:21:09 GMT
We see short term rates higher than longer term rates on RS reasonably regularly.
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