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.
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.
