The Anonymous Widower

Stability in Financial Systems

Adverts talk about get the strength of the insurance companies around you and you say that it’s as solid as the Bank of England.

I am a Control Engineer by training and one of the topics that is important is the concept of stability. Since I learned it all in the 1960s, the definitions have increased in scope a lot. I would describe a system as stable, as one that when you displace it, it returns to the same state of rest.

So as an example of a stable system, if you take a ball-bearing or marble in a typical kitchen bowl, it will lie in the bottom. Give it a small push and it will oscillate in and run round the bowl, until what friction there is returns it to the bottom. If however you balance the ball on say a football and give it even the tiniest push it will run off the edge.  That is an unstable system.

In everything we do, we always should deal with stable systems.

So let’s look now at a small savings bank with a 100 branches or so.

Rumours are circulating that the bank has made a silly investment on say the 15:30 at Cheltenham and the horse fell at the third fence. Well, not really! But a banking equivalent!

So savers start to panic, as for many, it is the only savings they have.  And when they panic, they withdraw their funds and put them under the nearest mattress.  Or at least a metaphorical one!

So the problem goes round in circles, from more panic and withdrawals, until the bank has nothing left to pay out and goes bust. We’ve all seen runs like this on banks and hopefully we don’t want to see any more.

So are there any stable financial systems?

Current, deposit and savings accounts in reputable UK banks and building societies, could probably be considered stable up to a government-guaranteed limit of I think £85,000.  It’s all laid out here. but then is it worth it for an interest rate of about 3%?

I have a strong feeling that Zopa, the peer-to-peer lender, is also a stable system. Other companies of the same type may well be too! but I am not as familiar with them as I am with Zopa.

Let’s look at an adverse event, that might affect Zopa.

Suppose another peer-to-peer lender gets involved in a mis-selling scandal or suffers a run because of some very bad publicity.

Let’s say this causes a lot of possible borrowers to look elsewhere. Now as demand has dropped, lenders, who are still keen to lend money, will drop their rates to account for the new situation. And then in turn these lower rates will entice more borrowers, thus restoring the system to where it started.

What actually helps the system become stable is that each lender has control of his own little feedback loop and as there are thousands of lenders, the system will adjust very quickly.

In a bank say, there will be one guy taking the decisions and he has a high chance of making a wrong one. All you need for a stable system, is for the average in something like Zopa to get it right.

You can look at other scenarios with Zopa and I haven’t found one yet, that doesn’t return to a stable position.

This stability could be your guarantee of a safer investment. I haven’t obviously got access to Zopa’s full data, but just like water finds its own level, a balance is probably struck between lenders and borrowers.

March 13, 2012 - Posted by | Finance | ,


  1. I would expect that bad publicity would be more likely to lead to a shortage of lenders rather than borrowers. The system would self-stabilise by interest rates rising and attracting back lenders.

    Comment by William | March 31, 2012 | Reply

    • You got it in one. It’s a bit like a tug-of-war between borrowers and lenders. The only thing that must be done, is to check the borrowers properly. And they do that!

      Comment by AnonW | March 31, 2012 | Reply

  2. […] I’ve said before that Zopa could be a classic stable system. […]

    Pingback by Zopa Gets Very Stable « The Anonymous Widower | September 2, 2012 | Reply

  3. […] know Zopa well, so what does their system have that is good. I mused in this post that Zopa might be a stable system, where borrowers and lenders find a sensible balance between […]

    Pingback by Regional Finance « The Anonymous Widower | November 17, 2012 | Reply

  4. […] business.  Hence my admiration for the Zopa model, which I think is very stable.  I said that here in a lot of […]

    Pingback by Robert Peston On Wonga « The Anonymous Widower | June 27, 2013 | Reply

  5. […] For some time, I’ve thought that peer-to-peer lending systems, and Zopa which I know best, in particular, are a very interesting proposition mathematically. I did muse on this question some time ago and the post is here. […]

    Pingback by An Investigation Into The Stability Of Peer-To-Peer Lending Systems « The Anonymous Widower | September 19, 2013 | Reply

  6. […] I shall watch the situation, but I still believe what I said in Stability in Financial Systems. […]

    Pingback by Is Peer-To-Peer Lending Having A Spot Of Bother? « The Anonymous Widower | September 2, 2017 | Reply

  7. […] eight years ago, I wrote Stability in Financial Systems, where I used my Control Engineering and mathematical experience to postulate that Zopa might have […]

    Pingback by What Exactly Is Upside Energy? « The Anonymous Widower | May 17, 2020 | Reply

  8. […] years ago, I wrote Stability in Financial Systems, where I put forward my belief that Zopa is a stable system, that adjusts itself to the conditions […]

    Pingback by Zopa Seems To Have Deconstipated « The Anonymous Widower | May 29, 2020 | Reply

  9. […] wrote Stability in Financial Systems in 2012, where I said […]

    Pingback by Zopa Co-Founders Speak Out Against Fintech’s Peer-To-Peer Exit « The Anonymous Widower | December 15, 2021 | Reply

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