A while ago, an investor said to me, “I don’t buy into the risk ratings of a well-known peer-to-peer lender because there is no reason why this lender may rate a risk correctly. Their objective is obviously to get as many loans originated in a short a period of time and then exit this market before the backlash occurs.
In a nutshell they don’t have the same commitment as an investor in assessing the risk of a loan and possibly may be conflicted in their assessment.”
It’s no secret that the risk assessment rating or grading or score (for want of a better word) of the risk of a peer-to-peer (as known as marketplace lending) lending investment does vary between one lender to another. Presently, it is highly unlikely that we will see international rating agencies getting involved in assessing the credit risk of individual marketplace lending loans due to costs, and liability concerns since the aftermath of the global financial crisis. I say this, not with a skeptical mind, but based on the fact that rating agencies have gone through a particularly turbulent period post global financial crisis where courts and regulators have raised questions about their rating of the risk.
The fact is, everybody has a different view about what the risk of an investment is. Particularly when it comes down to credit risk, there are contributory views on different ways a risk can be determined. For example, some assessment models focus on credit scoring. With the advent of tracking activity in the internet, you have some risk models that look to the activity of the underlying borrower on the Internet and take that as being a form of reflection of what the credit risk looks like. You have other models that use a linear process or an elimination process where the applicant goes through various questions and as each of these questions are answered in the positive and negative, the underlying borrower will be categorised until finally a risk rating is given to that borrower. When you ask a peer to peer lender they will tell you the way they risk assess is the best way.
Clearly, a concern for a number of the global regulatory authorities is that to give a risk rating view by a marketplace lender is possibly fraught with danger and may not be compliant with the recent rating agency’s regulations. That’s not to say based on historical data and also on other factors, that certain marketplace lenders have been quite good at giving their ratings to the loans that they originate. It’s point that some investors cannot be comfortable with someone giving a rating to a loan where they themselves have an underlying interest in ensuring that the rating is favourable and they can be successful in their business. Whilst they may say that’s not a consideration it is quite similar to international rating agencies saying they were not conflicted where the issuer has paid the rating agency to perform that function of rating the securities they issue. The fact is, there is a vulnerability in the risk assessment tool.
There is no doubt there are a number of models out there stating that they can produce certain assessments on risk.
What’s lacking is the availability of a risk assessment tool or model where the user can customize the risk assessment tool to their own preferences, enabling them to get a result that they would view as a risk profile of that investment. If you are a large institutional investor, the solution is to have your own team to internally assess the risk by building your own model or if you are a bank, and you are using the internal risk model you can use that.
What if the marketplace lender could give any investor what parameters they use to assess risk, and then that investor could input these into a risk model changing the ones they disagree with and get their own risk assessment?
How about a risk model that could be customised in the inputs as well and the factors are taken into consideration for the risk assessment, so an investor can add his own inputs to assess the risk?
How about a risk model that is cloud based, subscription based, simple to use and quick? Furthermore that a risk model is not expensive to use.
With Risk Assessment Intelligence (RAI) risk model, a solution is here, www.myriskai.com
- You can select the types of inputs you want to be considered in your risk assessment model,
- You can adjust the actual settings to how factors are weighted,
- You can add additional factors that should be considered in the risk assessment,
- After completing these preferences which are as simple as filling out a form and could take no more than 30 minutes, you could then run the risk assessment model against your investments and be able to tell what you think the risk assessment is for those investments ?
- The tool will take no longer than 30 seconds to assess the risk and will account for not just linear, but also multidimensional risk elements.
- The risk assessment model has been tested over the last 15 months with an established marketplace lender, Marketlend and the development of the model is a collaboration of defence force contractors, and credit risk analysts from finance and insurance industry.
For more details go to myriskai.com