Are P2P firms more or less risky than mainstream banking?
My latest blogpost: Peer to Peer Lenders v Mainstream BankingTweet this!
More or less risky for whom? The lender, the borrower, the economy, what? For the lender, sure, more risky than putting one's money in the bank, but the risk is outweighed for me by the respectable interest I receive, even after losses.
TM. The question is deliberately silent regarding 'for whom?' I wanted to generate debate on those very points.
I've not taken the plunge with them. I could well see a mini savings and loans style crisis coming to pass based around crowdfunding / p2p. But we're still a long way away from that.I've not looked into them in any detail, so wouldn't want to comment on how transparent they are. I guess the owners / workers in these places have no interest in wrecking their companies / employers.Then again, I see that there is a secondary market springing up for securitised p2p loans. So it might well be in their short term best interests to turn a blind eye to longer term risks.
If P2P aren't lending to buy land, then they are less risky.
The easy answer is that bank deposits are safer for depositers because they are protected by the FSCS. But it's worth remembering that when banks started hundreds of years ago they were regarded as risky. That is why the branches were built with heavy wood and leather interiors, to give reassurance that they were serious.A free marketeer would probably argue that the FSCS distorts the market, it results in a distorted view of risk for the depositer. It also probably influences how the banks behave, but I don't really know enough it to be more specific.Small businesses have been complaining in recent years that they can't get high street bank loans anymore.The reason I stay away fropm P2P is that returns are taxable, but are paid tax-free. Currently I am on PAYE so I don't have to complete a tax return, so I avoid anything that would cause me to have to fill in a tax return. But if you have to fill one in already you proabbly wouldn't be too bothered.
MW fyi, worryingly, they are thinking about lending for land purchase ( housing, needless to say).
As Richard Tee says, P2P is riskier for depositors because it’s THEY who carry the risk (as distinct from the existing system where the FSCS / taxpayer carries the risk). That raises the question as to which is better: a system where INDIVIDUAL LENDERS carry the risk, or one where risks are born more widely.Clearly any imposition on TAXPAYERS constitutes a subsidy of banks, so that backstop provided by taxpayers should be banned. But that in turn means there is no ABSOLUTE guarantee that depositors’ money is safe. Ergo that “100% safe” element in bank deposits should be banned.And that’s just one of the arguments for full reserve banking: a system under which if depositors want 100% safety, their deposits are just that. I.e. the money is just lodged at the central bank and/or put into short term government debt. In contrast, any depositor wanting their money loaned out to SMEs, mortgagors etc with a view to getting a better rate of interest has to carry the ultimate risk themselves. Money Market Mutual Funds in the US will soon have to obey the rules of full reserve.
If we forget about retail deposits for a moment and compare p2p with unsecured bonds. Which yields more? I genuinely wouldn't know.
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