Bank of England Governor warns P2P growth could create “conventional risks”
THE PEER-TO-PEER lending sector could become vulnerable to similar risks facing banks as it grows, the Bank of England Governor has warned.
Mark Carney, delivering a speech on fintech in Germany as chairman of the Financial Stability Board, said while P2P lending didn’t currently pose systemic risks, regulators may need to address issues as it gets bigger.
“Due to its small scale and business models, the P2P lending sector does not, for now, appear to pose material systemic risks,” he said.
“That said, as a general rule, it always pays to monitor closely fast-growing sources of credit for slippages in underwriting standards and the promotion of excessive borrowing.
“Moreover, it is not clear the extent to which P2P lending can grow without business models evolving in ways that introduce conventional risks, including maturity transformation, leverage and liquidity mismatch, or through the use of originate and distribute models such as those seen in securitisation in the 2000s. Were these changes to occur, regulators would be expected to address such emerging vulnerabilities.”
His comments echo concerns expressed by former Financial Services Authority chairman Lord Turner, who told Peer-to-Peer Finance News that regulators could be more worried if the sector gets too complex.
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Responding to Carney’s comments, Jane Dumeresque, chief executive of Folk2Folk, told Peer-to-Peer Finance News: “It is of course encouraging to see the Bank of England taking our sector more seriously.
“It is important that as an industry we don’t sacrifice loan quality over growth as we want to maintain high standards through regulation and responsible lending. The benefits of the direct P2P lending model can mean lower costs for borrowers at the same time providing a fair risk/adjusted return to investors.
“Platforms like Folk2Folk offer a simpler and more transparent form of finance by matching borrowers and investors directly, avoiding the complexities of maturity transformation. At Folk2Folk we believe that this direct lending model secured with our borrower’s property helps to reduce the risk to investors and will lead to a more stable financial eco-system in the future.”
However, Kevin Caley, founder and chairman of ThinCats, added: “Mark Carney’s views that P2P may not be able to grow in a risk-free and sustainable way, due to issues such as leverage and liquidity mismatches, seem at odds with the very nature of the sector.
“The whole point of P2P is that lenders make loans directly to borrowers with no intermediation, and for that reason it cannot involve leverage or liquidity mismatch. By using a ‘pure’ P2P approach, the industry has achieved fast but sustainable growth, and any future risks will be regulatory ones, as opposed to systemic risks associated with P2P.
“It should be remembered that P2P is a product of the SME lending market, which for hundreds of years was monopolised by a few large banks. The advent of P2P is due to the banks largely losing interest in the SME market, and has offered a new and innovative a way to break that monopoly. The economy requires stimulus from the ground up and the alternative finance sector is playing a vital role in this by bridging the business funding gap.”