Given the current economic expansion has already lasted more than 10 years, many economists, and others, had warned about a coming recession.1
But with solid economic indicators and supportive actions from the Fed in 2019, a majority of economists The Wall Street Journal polled are now pointing to a potential recession occurring in 2021 rather than in 2020.2
Whenever the next recession hits, we intend to be ready. Below, we share our three-pronged framework and action plan for thinking about and preparing for the next one.
keep tabs on where the economy is headed. Among external sources such as consumer spending and unemployment trends, we draw on Moody’s Analytics for economic forecasts and scenario analysis. As Figure 1 depicts, and in line with our thinking, Moody’s predicts the next recession will likely be moderate compared to 2007-2009’s severe one. We also regularly speak with and follow a variety of industry strategists.
Our institutional investors provide a crucial barometer of economic and financial market insights, opportunities, and headwinds. We are in constant dialogue with them regarding their funding capacity, return expectations, and preferences on structure.
We also look to other consumer asset classes, both secured (such as auto and mortgage) and unsecured (such as credit card), to provide valuable intelligence as to how marketplace loans could respond to changes in the economic environment.
Recession Severity Index: Composite of Key Indicators3
Lastly, our credit risk team has a deep bench of consumer expertise that spans economic cycles and financial market segments. It brings this to bear in developing and analyzing forecasts and in setting strategy.
Consumer loans perform differently than most asset classes—which is a key reason they may be a compelling addition to a diversified portfolio. They are most correlated to the unemployment rate. This makes intuitive sense. So drawing upon current and historical unemployment data helps us understand how LendingClub loans might perform in a downturn. We look at overall unemployment trends as well as local market dislocations such as the Houston oil price crash for examples of what could happen to consumers during the next recession.
Drawing on this rich unemployment data, we’ve developed models to gauge the impact of a potential recession. As we shared in Marketplace Loans: How Might They Perform During A Downturn, we believe marketplace loans may provide resiliency and a degree of downside protection in the next dislocation due to: 1) different return drivers than other asset classes; 2) short duration; and 3) historically steady consumer demand for credit across economic cycles.
We have a variety of tools at our disposal to protect investor returns during a recession. We take a dual approach, using both front-end credit strategies as well as back-end servicing and collections activities.
Front end: Our goal in the next recession would be to quickly match the supply of borrowers with the demand from investors. We have several tools in our arsenal here, including tightening or loosening credit standards, making strategic pricing adjustments, and more. Balancing supply and demand is a key differentiator of LendingClub’s marketplace, and its persistent growth year-over-year is testament to our ability to manage these shifts over time.
Back-end: In a recession, some borrowers need temporary help to get back on track. Having options like payment plans is a helpful tool; one way we’re addressing this is by introducing a range of short- and long-term payment plans.
Another key for servicing borrowers in a recession is to be able to flex collections capabilities to meet changing customer needs. We’re investing in this by transitioning to a third-party loan servicing system. We also relocated our operations team to a lower-cost market and have partnered with some third-party loan servicers. We anticipate all of these steps will improve the experience for customers and investors as well as enable greater flexibility in our cost base, including the ability to quickly ramp up and down collections resources as our needs change and as wider economic conditions dictate.
Our multifaceted approach—monitor, measure and mitigate—has proven successful in weathering changes in borrower and investor demand to date. We anticipate that our ongoing investments will only continue to strengthen our ability to respond in the next recession.
1. The Wall Street Journal, “Economists See U.S. Recession Risk Rising.” January 10, 2019.
2. The Wall Street Journal, “U.S. Expansion Expected to Continue Through 2020 – WSJ Survey,” https://www.wsj.com/articles/u-s-expansion-expected-to-continue-through-2020-wsj-survey-11576681200, December 18, 2019.
3. Moody’s Recession Severity Index is comprised of the key financial and economic variables it monitors to track recession likelihood and potential severity. Blue bars denote historical recession impact, versus Moody’s predictions in green, while red bars indicate the Index’s current forecasts.
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