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Showing posts with label Lending. Show all posts
Showing posts with label Lending. Show all posts

Sunday, 27 December 2015

09:52

Peer to peer lending is where China has to get smart

Peer to peer lending is where China has to get smart

An overly regulated structure will not help get funding to those who need it most

In October, China’s leaders revealed details of the 13th Five-Year Plan, which will guide the economy’s trajectory until 2020.

Gone are the directives to expand industrial production at a breakneck pace that characterised previous five-year plans. Now, the focus is on achieving sustainable long-term growth, underpinned by domestic consumption, a stronger services sector, entrepreneurship, and innovation.

The internet — which already has more than 680 million active users in China — will play a key role in facilitating this shift. In particular, online peer-to-peer (P2P) lending, a streamlined approach to credit allocation, may hold the key to expanding and deepening China’s financial sector, enabling firms to grow and innovate, and bolstering domestic consumption.

In online P2P lending, individual (and, lately, institutional) investors provide funds that can be lent out to individual borrowers, without involving a traditional financial intermediary. Loans can range from 100 yuan (Dh56.83, $16) to 1 million yuan, and target small and medium-size enterprises (SMEs), as well as individual borrowers, that currently struggle to access credit through traditional institutions.

Over the last three years, China’s P2P lending sector has been growing annually at an astounding average rate of 245 per cent, with its total value reaching 253 billion yuan last year. China now has more than 2,000 registered active P2P loan platforms, up from just 50 four years ago.

Even so, P2P lending still accounts for just a small fraction of overall lending in China. Last year, total loans issued through peer-to-peer networks were equivalent to just 1.5 per cent of the 15.1 trillion yuan in consumer loans issued by Chinese banks.
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Sunday, 20 September 2015

08:51

The Fed's Interest On Reserves Policy Is Not "Paying Banks Not To Lend"

The Fed's Interest On Reserves Policy Is Not "Paying Banks Not To Lend"

The FOMC has decided not to raise interest rates – for now. But it’s still widely expected that rate rises will come soon, possibly by the end of the year. Some people think that QE should be unwound first, but the Fed’s plan is to raise rates first. The Fed will unwind QE gradually as the securities it has purchased mature.

This creates a problem. Because of QE, the banking system is awash with reserves. Banks have more cash on deposit at the Fed than they need to settle customer deposit withdrawals (payments), and they therefore don’t need to borrow funds from each other as they would in normal times. Because of this, the Fed Funds rate – the rate at which banks borrow from each other – no longer influences bank behaviour. It has fallen to zero.

Well, nearly zero. Actually the Fed Funds rate hovers somewhere between zero and 0.25%. This is because the Fed is paying interest at 0.25% on excess reserves (IOER). Paying IOER prevents the Fed Funds rate from falling to zero. The Bank of England, which also pays IOER though at a slightly higher rate (0.5% instead of 0.25%), helpfully explains how this works (my emphasis):

Reserves accounts are effectively sterling current [checking] accounts for banks. Reserves balances can be varied freely to meet day to day liquidity needs, for example to accommodate unexpected end of day payment flows. The rate paid by the Bank on reserves account balances is also the means by which the Bank keeps market interest rates in line with Bank Rate.

Since March 2009, implementation of the Bank’s monetary policy has involved both keeping short-term market interest rates in line with Bank Rate, and undertaking asset purchases financed by the creation of central bank reserves in line with MPC decisions (so-called ‘Quantitative Easing’).

Under the reserves averaging regime used in more normal times, the Bank supplies the amount of reserves required for banks to meet their aggregate reserve targets. An excess supply of reserves, relative to that demand, would tend to push down on market interest rates. As a result of large scale asset purchases, the supply of reserves largely varies in response to the MPC’s policy decisions, rather than the changes in the demand for reserves. This potential imbalance in the demand and supply of reserves could have resulted in loss of control over market interest rates had banks been required to continue to set and meet targets. The Bank therefore suspended reserves averaging in March 2009, and banks are not currently required to set targets for their reserves balances.

Instead, the Bank currently operates a ‘floor system’ whereby all reserves balances are remunerated at Bank Rate. Because banks will not lend their surplus reserves to other banks at rates lower than can be obtained by depositing them with the Bank, this has the effect of flattening the demand curve for reserves after the point where there are sufficient reserves in the system for banks to manage their day to day liquidity needs.

So by paying banks to deposit funds with them, central banks set a “floor” on the rate at which banks will lend funds to each other – the Fed Funds rate, or “Bank Rate” in the UK. Therefore IOER is monetary policy. It enables the Fed to retain control of interest rates when the system is flooded with excess reserves.

Unfortunately the purpose of IOER has been widely misunderstood in mainstream media. Here’s Binyamin Appelbaum in the New York Times, for example:

Yet the Fed has found itself forced to experiment. The immense stimulus campaign that it started in response to the 2008 financial crisis changed its relationship with the financial markets. It has pumped so many dollars into the system that it cannot easily drain enough money to discourage lending, its traditional approach. Instead, the Fed plans to throw more money at the problem, paying lenders not to make loans.

Sorry, Binyamin, this is completely wrong. Banks are not being paid not to make loans. They don’t lend out reserves to customers. They only lend reserves to each other. By competing with banks in the market for reserves, the Fed controls the price at which they lend reserves to each other. It has nothing whatsoever to do with customer lending.

Source :Forbes.com
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