Peer to Peer (P2P) lenders, online platforms connecting borrowers with lenders, will not pose a level of systemic risk comparable to the banks, according to experts, speaking at the Guernsey Fund Forum Conference in London.
P2P businesses have proliferated recently as banks retreat from lending. PricewaterhouseCoopers (PwC) estimated the P2P space could grow to $150 billion by 2015, up from $5.5 billion in 2014. However, it has struggled of late. Increased regulation and tighter credit conditions have caused problems at P2P providers. A number of losses have accrued at P2P providers’ riskier customers, prompting hedge funds and other investors to retreat from the asset class. Prosper Marketplace, a P2P lender, is reported to be laying off more than 25 per-cent of its staff.
Duncan Macphearson, senior vice president and head of capital markets for Europe at Starwood Capital Group, said the systemic risk from P2P lenders was far less than that of banks as they did not have excessive leverage or debt.
Regulators are scrutinising P2P lenders. The European Central Bank (ECB) is conducting reviews of P2P lenders and concluded that they were not credit institutions. Nonetheless, it is looking increasingly likely that some banks and credit institutions may start providing loans through P2P lenders, and this could force the ECB to rethink its stance.
Some investors are acquiring loan tranches from P2P lenders as a mechanism to generate a fixed income. These tranches often come in the form of securitisations, which has caused some concern given the parallels with sub-prime mortgages and collateralised debt obligations (CDO).
Lord Adair Turner, former chairman of the then UK Financial Services Authority (FSA) warned that the growth of P2P could result in significant losses. Lord Turner warned these losses over the next five to ten years “would make even the worst bankers look like absolute geniuses.” He added P2P lenders issued loans quickly – often at lower interest than banks – and questioned the veracity of their credit checks. If markets were to sour, there are fears borrowers could default leading to lenders nursing losses. A paper published by the World Economic Forum and Oliver Wyman warned investors they could face significant losses from P2P lenders.
P2P lenders highlight they conduct thorough credit risk assessments and operational due diligence on borrowers. Philip Hyett, director in the capital markets team at Funding Circle said the firm stress tested its portfolios using the same assumptions as the Prudential Regulatory Authority (PRA).
While the P2P space appears to be struggling at present, some have advocated that custodian banks take a growing note of what is happening, and develop services for these disruptors.
P2P systemic risk level not comparable to banks, says panel
P2P lenders, online platforms connecting borrowers with lenders, will not pose a level of systemic risk comparable to the banks, according to experts at the Guernsey Fund Forum Conference in London.