Re:China's Peer-To-Peer Lenders Are Falling Like Dominoes as...
by xivzgrev on Wednesday August 01, 2018 @04:48PM
(#17666843)
I worked at one such lender. Here’s how they actually work with banks.
Banks, being an integral part of the financial system, are only allowed to take on so much risk. Third party companies have no such restrictions. But they can’t issue loans because they are not a bank. So what happens is a bank issues a loan according to criteria the bank and the third party agree to. Then the bank sells it the next day to the third party. That way the bank is more insulated from risk because they aren’t holding the loan.
Some p2p companies such as lending club actually do the same thing. The bank sells the loan to lending club, and then lending club essentially “sells” to all the individual investors: lending club doesn’t take the hit when people default.
The downside of such a model, besides missing out on upside, is requiring volume. You need lots of it to keep the lights on. So if investors get spooked you are in a world of hurt, which is probably what is happening here.
Banks, being an integral part of the financial system, are only allowed to take on so much risk. Third party companies have no such restrictions. But they can’t issue loans because they are not a bank. So what happens is a bank issues a loan according to criteria the bank and the third party agree to. Then the bank sells it the next day to the third party. That way the bank is more insulated from risk because they aren’t holding the loan.
Some p2p companies such as lending club actually do the same thing. The bank sells the loan to lending club, and then lending club essentially “sells” to all the individual investors: lending club doesn’t take the hit when people default.
The downside of such a model, besides missing out on upside, is requiring volume. You need lots of it to keep the lights on. So if investors get spooked you are in a world of hurt, which is probably what is happening here.