Last week the UK Chancellor of the Exchequer asked the Bank of England’s (BoE) Financial Planning Committee (FPC) to investigate the potential systemic risks non-bank finance poses to the UK economy, by the end of the year.
Chancellor Rishi Sunak noted the growth of non-bank finance – which would include the likes of P2P and debt-based securities – has helped diversify the supply of finance to the economy.
Ever since the 2008 credit crunch, which led to banks lending less to SMEs, alternative lenders have played an important role in providing finance to large swathes of the economy.
As coronavirus devastates the world stock markets and, according to some commentators, potentially pushes us towards another global recession, this may become even more important in the future.
Although banks are currently still lending, if they begin to tighten up credit, alternative finance providers, including P2P and DBS platforms, will prove increasingly important in providing SMEs with the liquidity they need to operate.
As the sector becomes more important, so too will the importance of effective oversight of it by regulators and the BoE.
For this reason, Sunak said: “Given the importance of being able to effectively monitor, assess and take action to mitigate risks to the stability of the whole (or significant part) of the UK financial system, I have recommended that the Committee publishes a more detailed assessment of the oversight and mitigation of systemic risks from this sector by end 2020.“
Although he did not ask for the full report until the end of the year, he added that he would be grateful to receive the preliminary findings of this work by July.
This assessment should detail the adequacy of the risk oversight systems for non banks, including how well systemic risks are identified and monitored via existing data and the risk mitigation system for non-banks, including the availability and effectiveness of tools and the UK’s framework for dealing with systemic risks.
It should be pointed out that several P2P lenders already conduct stress testing on themselves in a manner similar to that of banks.
According to a blog post by Funding Circle’s chief risk officer, for example, the platform regularly performs stress tests using the adverse scenario modelled by the Prudential Regulation Authority, and applying it to the projected returns of loans being taken out. Even under these stressed scenario’s Funding Circle expects returns to reduce from 5% – 7% to 2% – 5%.
Meanwhile Ratesetter has told P2Pfinancenews that it had begun stress testing it’s Provision Fund.
There are also third parties which conduct stress tests on P2P providers. 4th Way analyses P2P historical loans and extrapolates what might happen to those loans, or a similar batch of loans, in the event of a downturn. It claims these tests are stricter than those conducted by banks around the world.
In its review of Zopa, it noted: “Using 4thWay’s strict version of the international standard banking Basel stress tests, it seems likely that most lenders will continue to make money even through a severe downturn similar to 2008-2009.
In addition to this, recent regulatory updates to the P2P sector have given platforms minimum standards for underwriting, as well as more stringent rules around winding down arrangements, should they collapse.