Peer-to-Peer Lending:
Background:
The business of credit intermediation has changed since the financial crisis. Prior to the crisis, the banking system seemed to under-estimate expected risk, in part because it used a historical time period for the estimation of this risk based on a long period of a low level of defaults and low volatility in markets (a period of economic success in terms of growth and employment). When the financial crisis hit, the western world entered a period of low or negative growth and falling employment levels. These economic conditions led to actual default rates and loss given default (LGD) rising well above expectations. Since bank equity was insufficient to cover such losses, some financial institutions collapsed.
In the equity markets, small companies have long complained that the fees charged by investment bank equity capital market departments are unacceptably high and that the regulator requirements of a public issue are too costly to meet.
In the new economic model for financial market intermediation post crisis, regulators are trying to encourage more credit intermediation to be undertaken outside the banking system for example through bond markets. A new form of intermediation has also been developed – peer-to-peer lending sometimes known as crowdfunding. We now have websites for credit intermediation such as Zopa in the UK and LendingClub (LC) in the US and also equity crowdfunding through, for example, Crowdcube.
MAXIMUM 500 WORDS (excluding Figures, Tables and list of references)
Question
1. LendingClub is a very successful US P2P.
The graphic above shows its business model and is taken from its latest prospectus for its IPO dated 20 October 2014 (available on the internet). Explain how its business model works and in particular whether it is acting as agent or principal, is using a balance sheet or not, is originating loans or not, is taking the risk of issuing fixed price liabilities or not and any other relevant issues. You should compare this business model with the agency based UK P2P model such as that used by Zopa or LendLoanInvest.
Information Sources There is a lot of information available on crowdfunding and other aspects of this project, on the web. You need to search for all the terms in the project to be sure you understand them all.
A couple of useful web articles are:
https://www.xcdsystem.com/iie2014/abstract/finalpapers/I504.pdf which is on the LC business model, and;
https://www.forbes.com/sites/tomiogeron/2013/10/18/with-ipo-in-sight-lending-club-looks-to-upend-banking-industry/
which gives Forbes view.