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I build statistical models for banks which help assess the risk of a loan. Effectively, my models will get converted into the grades (A, B, C, D, etc.) mentione
by radmuzom 11y ago
I build statistical models for banks which help assess the risk of a loan. Effectively, my models will get converted into the grades (A, B, C, D, etc.) mentioned in the article. The strategies (second chance, family guy, safe haven) are generally consistent with experiences from the portfolios of most financial institutions.
However, I am skeptical (prove me wrong) of the statement in the article - "Lenders get a return on their investment that is typically much better than traditional Certificate of Deposit or Saving Accounts". In finance terms, I will be surprised if they have a higher RAROC [1] as compared to large banks. If they really do, then congratulations (you will put banks out of business in a few years)??
[1] https://en.wikipedia.org/wiki/Risk-adjusted_return_on_capital https://en.wikipedia.org/wiki/Risk-adjusted_return_on_capita...
- ClementM 11y agoGlad that my findings match yours ! I think it does beat a C.D. from a risk/return perspective. It's probably higher risk than a C.D. but returns largely compensate for it I believe. To me this is possible because the Lending Club is desintermediating a business that was traditionnally 'high margin'.
- dragonwriter 11y ago> In finance terms, I will be surprised if they have a higher RAROC [1] as compared to large banks. If they really do, then congratulations (you will put banks out of business in a few years)?? Or, more likely, just drive down bank profit margins.
- guelo 11y agoI don't know much about the banking industry but savings accounts and CDs have always felt scammy to me. They're marketed to the rubes that have no idea what they're doing so they can get away with not being competitive with other financial instruments.
- jklein11 11y agoThe reason why savings accounts and CDs have such a low interest rate is because they are far less risky than other financial instruments. If you compare them to other assets with a similar risk profile and payment structure, such as short dated treasury notes and annuities, you will find that the rates are at least competitive. Disclaimer: My response has a US bias.
- mludlum 11y agoSavings accounts and CD's are FDIC insured vehicles - they are not meant to grow in value but be safe and easy to access in the event you need funds.
- techcreditcard 11y agoYour background sounds interesting! I'm working on bringing a credit card to the subprime market. Would be great to connect with you.
- akg_67 11y agoYou are correct, a comparison with CD/SA is an incorrect comparison that doesn't take into consideration the default premium and liquidity premium included in Lenders' return. CD/SA is as close to risk free return (with FDIC insurance) as you can get while Lending Club loans are unsecured loans (highest risk fixed-income investment).
- paulsutter 11y agoBanks haven't proven too skilled in estimating risk (see 2007). The average Lending Club lender is surely worse than the banks, but the best ones are surely better. Net it all out and hopefully we get a Darwinian marketplace for lenders, lenders who don't need acres of employees preparing powerpoints for each other in class A office space. Of course, the true measure of estimating risk is hidden until a crisis occurs. Interesting to see where it all ends up.
- jldugger 11y ago> Banks haven't proven too skilled in estimating risk (see 2007). Arguably, they demonstrated that you can accept a lot of risk and then if things go wrong the Fed will bail you and your creditors out. Not _quite_ the same thing as simply underestimating risk.