Bank stress tests herald an opportunity for P2P sector

The 2016 stress tests conducted by the Bank of England’s Prudential Regulation Authority (PRA) revealed that three of our major banks would not to be able to withstand another financial crisis on the scale of 2008. RBS, Barclays and Standard Chartered were all found to be vulnerable while the remaining four – HSBC, Lloyds Banking Group, Nationwide and Santander – were judged to be sufficiently robust.

However, the reality is that, although the tests replicate the Armageddon scenario of another synchronised global recession (which includes, for example, the prospect of UK residential property prices falling by 30%), there is no real chance that the Bank of England would ever allow any of them to go bust. In the meantime, the three banks that failed the tests are being granted leave to boost their financial resilience as a precaution.

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Some commentators have been quick to suggest that perhaps the P2P lending industry should undergo similar stress testing on the basis that the vast majority of the operators have never experienced an economic recession. While this argument may have some headline appeal, it ignores the fact that banks are balance sheet lenders whereas P2P lenders are not – they simply match borrowers with lenders via internet trading platforms and the terms and interest rates applicable to both parties are fixed throughout the lifetime of the arrangement. Loans can still go bad, of course, but that outcome should not have a direct impact on the solvency of the platform operator. It is a non-argument.

One useful reminder from history is that the last time we had a recession the first instinct of the banks was to draw in their horns and stop lending, especially to the hard-pressed SME sector which, according to the FSB, provides 60% of private sector jobs and accounts for nearly half of private sector turnover. It was against this economic backdrop that the P2P lending industry was born in the first place. Difficult conditions represent opportunity.

Of more concern, perhaps, was the recent announcement by Zopa – the one company that was created pre-recession in 2005 – that it is to stop taking in funds from investors without there being sufficient loans in which to put their money.

Zopa, which had accumulated losses of £20m over 11 years of operations, specialises in consumer loans, but there is evidence to suggest that SMEs, too, are not so eager to borrow money as they once were. Commenting on Q3 this year, Mike Conroy, the British Banking Association’s MD for Business Finance, stated that: “…there is clearly lower demand for finance for businesses overall than in the same quarter a year ago. This subdued demand reflects reduced or postponed investment plans and confirmed deposit holding, particularly by smaller firms, as they operate within an uncertain trading environment.”

In the circumstances, it seems the arrival of the Government’s new Bank Referral Scheme, which officially went live on November 1, could not be more timely. Growth-minded SMEs and interest-starved lenders could both find what they are looking for through a vibrant P2P business lending sector.

Are the big institutions embracing the wisdom of Crowdlending?

The fallout of the stress tests has generally been good news for the Banks. As I discussed in my earlier post, Standard Chartered and Royal Bank of Scotland, however, struggled and only got over the line by promising to keep back more capital. RBS announced that they had shed some of their riskier assets, including Irish property loans to the tune of £1.62 billion that seemingly had the potential to bring rich reward; the spectre of the burst of the Irish property bubble clearly enough to put the bank off. Therefore, it isn’t exactly a surprise that RBS recently announced plans to lend money to mid-sized businesses in conjunction with three global asset managers, namely AIG, M&G and Hermes Investment Management. The partnership will aim to provide finance to between 75 and 80 mid-sized businesses with loans ranging from £25 million to £100 million.

The partnership will allow RBS to benefit from extra due diligence carried out by the asset managers, as well as allowing the bank to further diversify risk. The funds benefit from exposure to an established market that was previously restricted to traditional finance providers. However, the link comes as a result of asset managers increasingly acting as “shadow” banks with companies approaching them for finance. The new partnership will see RBS continue to carry out the brunt of client negotiation directly with the borrower, whilst the asset managers carry out their own due diligence and credit analysis.

The primary (only) benefit to the borrower would be the consolidation of parties to negotiate with; however I would reason that dealing with scrupulous, profit driven asset managers alongside the sluggish, outdated bureaucracy of the banks will hardly speed the process up for borrowers. The relationship is aimed at a niche group of businesses that are already backed by private equity companies, so the move to “Crowdlending” is certainly a tentative, experimental one. It does nothing to combat the issue that the banks aren’t lending to SMEs, the lifeblood of the British economy. But it does show that the banks are willing to share their clients with other finance providers to ensure that a solution is available.

This is all very good news for Peer to Peer Crowdlenders who aim to fill the SME finance gap: expect to see more partnerships with banks emerge that allow banks to continue to lend to small businesses to the extent that their capital resources allow, with specialist crowdlending platforms plugging the gap. Indeed, only yesterday, AltFi reported the news that ThinCats had sold a 73.4% stake in the company to ESF Capital, a European specialist investment firm, in the process appointing ESF Capital CEO John Mould as ThinCats CEO. The view here is that the linking with an investment firm will bring significant new money to lend SMEs, and Mould’s appointment will certainly facilitate that. After all, Mould is the former COO and CFO of the aforementioned Hermes Investment Management- RBS could be the first of the “Big Four” banks to start lending across a Crowdlending platform to UK SMEs; and in all likelihood it will be followed by the others.