P2P loans could change global lending practices

PurposeThis research analyzes borrowers' credit utilization through prepayment behavior in peer-to-peer (P2P) lending. The authors investigate factors influencing the decision to prepay and assess the role of P2P lending as an alternative source of consumer credits.Design/methodology/approachThe authors use individual loan-level data from the LendingClub, one of the largest P2P platforms in the USA. The authors use a Logit model and a sample selection model estimated by the two-stage Heckman method. The empirical analysis considers borrower-specific and loan-specific characteristics as well as macroeconomic factors.FindingsThe authors present a number of significant findings that can enhance understanding consumers' financing decisions. The authors offer evidence that borrowers are able to take advantage of cheaper loans offered by P2P lending to better manage credit card balance and consolidate debt. The authors find that borrowers tend to prepay P2P loans quickly when the aggregate cost of borrowing is low, suggesting that P2P lending offers an efficient alternative to obtain credit. This is particularly true for creditworthy borrowers that are able to take advantage of competing sources of finance. The authors' results provide evidence that P2P lending can improve consumers' optimal credit utilization.Originality/valueP2P lending has grown exponentially and has become a significant credit supplier to consumers and small businesses. While the existing literature mostly focuses on default risks, prepayment has received much less attention. This research fills in the gap and investigates borrowers' prepayment behavior in P2P loans and the role of P2P lending as an alternative source of consumer credits.

FinTech has several activities in it, one of which is Peer-to-Peer lending. P2P (Peer-to-Peer lending) financing is an alternative for micro, small and medium enterprises (MSMEs) to obtain funding. This study identifies the benefits of MSME P2P lending. Analyzing credible sources through an interview process with MSME actors who have utilized peer to peer lending facilities. This study uses a qualitative method. Analysis shows that P2P lending benefits MSME. First, P2P lending offers easier and faster access to financing, which helps MSME get loans from traditional banks. Second, the P2P lending platform offers flexibility in loan terms that can be tailored to the unique needs of each MSME, increasing their chances of obtaining financing. In general, peer-to-peer lending requires very appropriate benefits for MSME actors.

Funds sharing regulation in the context of the sharing economy: Understanding the logic of China's P2P lending regulation

As massive Chinese P2P platforms have failed dueto moral risk and liquidity risk, which decreased investorsconfidence in P2P lending, the major question facing the futuregrowth of P2P platforms is how to best build investors trust. This study was based on the elaboration likelihood model andexamines how to persuade investors to develop initial trust inP2P platform. The empirical analysis results support the financialand credit status of P2P platforms are key elements in buildingthe trust of investors. The social capital, risk management, andoperating duration provide the necessary support to increase thenumber of platform investors. The average interest rate and thedisclosure of information by the borrowers does not significantlyaffect the number of platform investors. These findings willfacilitate future development efforts for p2p lending and therational investments of investors.

Peer-to-peer (P2P) lending became a global phenomenon in recent years. Despite their prominence in the “FinTech” era, P2P platforms remain a risky investment because of the high default rate of unsecured personal loans funded on such platforms. In contrast, the rate of return can be much higher than that of other investments if P2P loans are repaid. Therefore, investors of P2P loans need information about borrowers’ ability to repay. An important channel is to learn from other investors who may have information advantages. We argue that, because collective effort from investors is required in P2P lending, it could be optimal for informed investors to bid early in projects with the purpose of signaling the quality. With a unique data set from Prosper.com, we find that informed investors are indeed more likely to bid in the early stage of a project with a low probability of being funded, whereas uninformed investors will follow. The “squatting” behavior (early bidding) of informed investors facilitates information spillover to uninformed investors, benefitting the investors and borrowers who otherwise may not raise sufficient funding. Our findings also have implications for P2P lending platforms on how to manage the information asymmetry and strategic behaviors of investors.

Relative performance and systemic risk contributions of small and large banks during the financial crisis

Financial Literacy in For-Profit vs Pro-Social Peer-to-Peer Lending

Systemic Risk in the Italian Banking Sector

A Factor-GARCH Approach to Conditional Risk and Return in Banking Stocks: Comparison of Industry Effect in Taiwan, Hong Kong, and Mainland China

This paper explains the process of competitive deregulation that led both the US and the UK to embrace universal banking and to abandon the functional separation of financial activities that had long characterized their financial systems. The paper argues that some of the consequences of favouring universal banking over functional separation that were understood in the 1930s were rarely voiced in years preceding deregulation. The principal argument offered in favour of separation was that the commercial banking system, which is supported by a government ‘safety net’, needs to be protected from the risks inherent in investment banking. By contrast, this paper argues that functional separation played an important role in protecting capital markets from the banking system.Universal banking is associated historically with thinly traded stock markets, and this paper argues that universal banking promotes the formation of a small group of large dealer‐banks which dominate the financial system and whose interests are best served by trading on nonpublic over‐the‐counter (OTC) markets. The paper finds that just such a group played a key role in the growing importance of such OTC markets in the US over the past few decades.The paper then argues that the benefits of the greater liquidity that large universal banks can provide to capital markets are offset by the dangers they create when they err. Because mistakes at these large banks are often allowed to grow in size to match the size of the banks, they distort prices on financial markets and sometimes create systemic risk. Two recent examples are given: J.P. Morgan Chase Bank's ‘London whale’ fiasco and UBS, Merrill Lynch and Citibank's exposures to subprime mortgages.Finally, the paper explains that the Senate Report on the Glass–Steagall Act indicates that the Act was designed in part to limit commercial bank participation in the margin loan market, as this activity makes possible a feedback loop between increases in the money supply and increases in asset prices, which in turn can generate an asset price bubble in capital markets. The recent crisis has led modern researchers to rediscover the relationship between margin lending, feedback loops, and asset price bubbles that was well understood by at least some legislators in the 1930s. The paper argues that the recent crisis demonstrates that modern banking regulation needs to be informed by an understanding of the consequences that may arise when a financial system is dominated by universal banks.

In this paper, we expand the scarce literature regarding the effects of ownership structure and board composition on market measures of banks’ systemic risk. Based on a sample of 87 European banks over the period 2010–2016, we provide evidence that ownership concentration has a non-monotonic (inverted u-shape) relationship with systemic risk. Additionally, we find that board characteristics (board size and gender) affect a bank’s systemic risk, but for small banks only. Overall, our evidence suggests that the traditional banks’ size-focused approach to systemic risk study should be complemented with governance dimensions, especially in a context like the European one, where ownership concentration is high. Our results also imply that practitioners and policymakers should promote better governance practices in banks in the form of more adequate ownership and board structures that are better able to control systemic risk.

Margin Requirements and Systemic Liquidity Risk

Margin requirements and systemic liquidity risk

For what it concerns the first aspect, there are several definitions of systemic risk (see for in‐ stance: [1]; [2], [3] and [4]), but there is not any widely accepted definition for it. Nevertheless, we agree with the position of [5] who claimed that systemic risk can be identified by the pres‐ ence of two distinct elements: an initial random shock, as the source of systemic impact, and a contagion mechanism (such as the interbank market or the payment system), which spread the negative shock wave to other members of the system. Along this vein, a growing body of em‐ pirical research has already bloomed: [6] suggested a network approach to analyze the impact of liquidity shocks into financial systems; a similar approach was followed by [7] discussing the case of United Kingdom, Boss [8] for Austria, and [9] for Switzerland; more recently Sora‐ maki et. al. (2012) developed a software platform1 that employs graphs models for various pur‐ poses, including to monitor financial contagion spreading effects.

One item on the regulatory agenda is the need to increase competition in the financial system. Financial technology is replacing bricks-and-mortar distribution channels, reducing the need for economies of scale that has been a barrier to entry and growth. Financial services are being unbundled and the large banks, being financial conglomerates, face losing their grip on the market, as space is opened up for the lower-cost specialised providers of financial services that offer superior customer service. This is an opportunity not only for neobanks but also for smaller traditional banks that can update their skills and adapt. In Canada, small and medium-size traditional banks are trying to seize the opportunity. They continue to deploy a lending-based business model while taking advantage of FinTech for operational efficiency and digital distribution channels. They are also working towards AIRB licences in order to become capital efficient and increase their addressable market. Nevertheless, they face formidable challenges including their intolerance to loss, more expensive funding, more expensive and higher capital requirements, and the big banks’ market power. This paper discusses the risk strategies these banks can employ in their journey from start-ups to mid-sized and beyond. We provide numerical examples using the ROE framework.