ABA Banking Journal 5/08 - (Page 8) briefing notes. A Canadian site and a Dutch site have been shut down, he adds, and “in the U.K., we had to carve out a new category [with regulators].” Asheesh Advani, chief executive of Virgin Money, which operates similarly on both sides of the Atlantic—servicing pre-arranged private loans that are not subdivided—says, “By design, we’ve avoided the regulatory minefield from the beginning.” Lending Club could not take press calls during its mandatory “quiet period” with the SEC. Prosper, the biggest, true p-to-p lender (both Zopa and Virgin say they are not in that category) said it filed an S1 with the SEC last October and referred ABA BJ to a statement issued after Lending Club’s hiatus, noting that Prosper believes it is, “structured… in compliance with applicable state and federal laws.” Banking law specialist Walt Moeling, a partner in Powell Goldstein LLP, Atlanta, says, “If the SEC said ‘you have to register as a securities broker,’ I don’t think these sites could function.” It is possible for bona fide loans, even when they are shared, to be distinguished from securities, he says, but factors considered include the financial sophistication of the parties involved and how tailored the offers are. “The more it looks like ‘take it or leave it’ the more it looks like a security,” Moeling says Asked whether SEC regulation would kill the p-to-p model, Jim Bruene, a former banker who is now editor and publisher of the “e-zine” NetBanker, said, “Certainly, it’s a huge barrier to entry but my speculation is that it won’t kill it.” He added: “It’s not a good time in our financial regulatory environment to be introducing new models.” Bruene estimates that the value of pto-p loans would grow to $1 billion by 2010—more than ten times what it was last year. That estimate excludes Virgin, which last year administered $150 million, half of its cumulative total in five years of operation, originally as CircleLending, which Virgin acquired. Advani predicts Virgin’s loan volume will be $250 million this year and $2 billion by 2010, boosted by the big-ticket item of a reverse-mortgage-styled product, whereas most micro lenders focus on unsecured loans of $25,000 or less. Why p-to-p now Micro lenders have lots going for them. They are riding a massive wave of social networking, on sites such as Facebook, not to mention auction sites like eBay and the low-cost infrastructure of the internet. They are taking advantage of the fabled credit crunch and, arguably, they are tapping into a social shift some call the “positivity movement.” It’s not often that someone tells you how nice their fiancée is to help their Snapshot Efficiency ratios take a hit R elied upon by investors and internal decision makers alike, efficiency ratios can prove a powerful tool for evaluating banks. A simple ratio comprised of expense and revenue components, it provides insight that can be used to evaluate the overhead structure of a financial institution. Simply put, an increasing efficiency ratio over time means that an institution is losing a larger percentage of its income to expenses; a decreasing ratio means a bank is learning to operate more effectively. As can be seen in the chart, in 2007, the mean efficiency ratio for all public banks and thrifts increased for the second year in a row, reaching 67.73%, its highest mean in eight years. Public banks and thrifts saw total expenses grow 23.3% from 2006 to 2007, while operating revenue grew only 5.31%. This is a drastic change from 2006, when total expense and operating revenue grew 10.30% and 10.54%, respectively. In an environment where expenses doubled their year-over-year growth from one year to another and revenue growth has stalled, banks will have to adapt quickly or face the prospect of operating losses. So what has to give? Banks will have to reduce their expenses in any way possible: cutting dividends, shuttering or divesting lines of business and selling off assets. As the graph shows, even the largest public banks and thrifts may have to cut costs. Some have already started. National City reduced its quarterly dividend almost 50%, from 41 to 21 cents per share, and closed its wholesale mortgage division. Washington Mutual announced it will close a mortgage division and Bank of America has been shopping its prime brokerage. With a huge portion of expenses originating from compensation and benefits—which grew 9% from 2006 to 2007 for the entire industry—everyone knows that job cuts will definitely be on the table. Many of these decisions have already been made. Along with closing businesses and reducing its dividend, National City eliminated 900 jobs and Washington Mutual eliminated 1,000. As if things could not get worse, some pundits and analysts have estimated that Citigroup job cuts may top 30,000 through the coming year. And this is just the beginning. — Michael Andrews, SNL Financial, mandrews@snl.com Public bank mean efficiency ratios 69.00% All publicly traded banks Top 25 public banks by assets 67.00 65.00 63.00 61.00 59.00 57.00 55.00 2000 2001 2002 2003 2004 2005 2006 2007 8 MAY 2008/ABA BANKING JOURNAL Subscribe at www.ababj.com http://www.virginmoneyus.com http://www.prosper.com http://www.netbanker.com http://www.pogolaw.com http://www.snl.com http://www.ababj.com
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