Last month the Financial Stability Oversight Council (FSOC) released their annual report. This 165-page report highlights potential risks to our financial system by looking at new developments and providing recommendations to improve financial stability.
FSOC was established as part of the Dodd-Frank Act of 2010 and its mission is to identify threats to financial stability, promote market discipline and respond to emerging risks to the stability of the US financial system. FSOC is made up of heads of most of the financial regulatory agencies in Washington and was designed to help facilitate inter-agency communication.
FSOC produces an in depth annual report every year that covers pretty much all aspects of the financial system. Section 4.14 of this year’s report deals with new financial products and there is an entire section on marketplace lending. Here is their conclusion about our space:
Although marketplace lending has the potential to reduce costs and expand access to credit, the extent to which these benefits have been realized thus far is unclear. Furthermore, the marketplace lending model has not been tested through a full credit cycle. There are risks that misalignment of incentives could exist on these platforms.
One can’t really argue with the conclusions drawn here. They are basically saying the jury is still out on marketplace lending. It is still untested in a recession which is the most common criticism levied against our industry and one we can do little about. I disagree with the misalignment of incentives point but I know many industry observers who believe that is a potential problem.
In their section titled Potential Emerging Threats and Vulnerabilities the report bring up more concerns: [Read more…]