To understand marketplace lending better, we apply a banking risk-management approach to a portfolio of marketplace loans.
In this chapter, we conduct a financial analysis and stress test of a publicly available loan portfolio of marketplace loans for the year 2014.1 We also use the loan books for previous years to approximate default probabilities and prepayment characteristics of different rating classes.
Some platforms publish their loan books, both in the U.S. and in the UK. Nevertheless, we felt that the loan book of Lending Club, the U.S. market leader, might be a good proxy for the sector in general. We could run this analysis, based on our models and systems, with any loan book that a marketplace lending platform might make available.The model and the datasets we used in the analysis are available on the companion website for this book.
Disclaimer: Because Lending Club makes their loan books available online, we were able to conduct this analysis with real market data. We are grateful to Lending Club for sharing these data and applaud them for spearheading transparency and openness in the sector. Banks are nowhere near as open with their portfolios. If lenders are transparent about their loan books, this helps regulators and investors analyze exposure more effectively, which could be the first step towards a safer financial system.
The results of our analysis are simulated and are not describing gains and losses under real market conditions. It shall not serve as an endorsement for or against investing in marketplace loans. Even though we arrive at negative returns in our analysis when we apply stress conditions, this does not mean that investments in marketplace loans or Lending Club will incur a loss with certainty. The purpose of the analysis in this chapter is a what-if scenario analysis that might help us understand the asset class under different assumptions.
13.1