“The Role of Trust in Online Lending” with Isaiah Hull (Sveriges Riksbank), Yingjie Qi (Stockholm School of Economics) and Xin Zhang (Sveriges Riksbank)
We study the impact of trust on the expansion of online lending in the U.S. over the 2008-2016 period. Using data from the largest platform, we demonstrate that a misconduct-driven decline of trust in traditional banking is associated with a statistically and economically significant increase in online lending at the state level. To the contrary, increased social trust strengthens in-person, bank-based borrowing and informal borrowing, reducing the demand for impersonal online lending. Both of these effects operate primarily through borrowers. We also use a shock that affects only investors to demonstrate that distrust in traditional finance increases participation in online lending.
- Keywords: financial development, consumer loans, bank misconduct, FinTech.
“Monetary Normalizations and Consumer Credit: Evidence from Fed Liftoff and Online Lending” with Isaiah Hull (Sveriges Riksbank) and Xin Zhang (Sveriges Riksbank)
(This version: 05/2017; First version: 03/2016; Sveriges Riksbank Working Paper No. 319)
On December 16th of 2015, the Fed initiated “liftoff,” a critical step in the monetary normalization process. We use a unique panel dataset of 640,000 loan-hour observations to measure the impact of liftoff on interest rates, demand, and supply in the online primary market for uncollateralized consumer credit. We find that credit supply increased, reducing the spread by 16% and lowering the average interest rate by 16.9-22.6 basis points. Our findings are consistent with an investor-perceived reduction in default probabilities; and suggest that liftoff provided a strong, positive signal about the future solvency of borrowers.
- Keywords: monetary normalization, monetary policy signaling, consumer loans, credit risk.
“Revisiting the role of central banks as liquidity providers – old and new challenges” with Johan Molin (Sveriges Riksbank), The Sveriges Riksbank Economic Review 2016:2, September 2016.
This article offers a review of the role of central banks as providers of public liquidity. Against the backdrop of the global financial crisis of 2007-2009, we discuss various challenges for public liquidity provision and the effectiveness of central bank lending facilities. These challenges help us identify potential gaps in existing mechanisms and frameworks governing liquidity assistance. We discuss how the available liquidity policy tool kit can be used to deal with the challenges. Furthermore, we highlight modifications to existing central bank facilities during and after the global financial crisis. We point at trade-offs faced by policy makers and describe potential pitfalls for public liquidity providers. Lastly, we attempt to look ahead and outline some specific challenges posed by more recent structural, regulatory, and technological developments in the financial system.
- Keywords: central bank liquidity assistance, liquidity provision, liquidity policy, Great Financial Crisis.
“Fed Liftoff and Subprime Loan Interest Rates: Evidence from the Peer-to-Peer Lending Market” with Isaiah Hull (Sveriges Riksbank) and Xin Zhang (Sveriges Riksbank) (First version: March 2016)
On December 16th of 2015, the Fed initiated “liftoff,” raising the federal funds rate range by 25 basis points and ending a 7-year regime of near-zero rates. We use a unique dataset of 640,000 loan-hour observations to measure the impact of liftoff on interest rates in the peer-to-peer lending segment of the subprime market. We find that the average interest rate dropped by 16.9-22.6 basis points. This holds for 14 and 28 day windows centered around liftoff, and is robust to the inclusion of time dummies and a broad set of loan-level controls. We also find that the spread between high and low credit rating borrowers decreased by 16% and demonstrate that this was not generated by a change in the composition of borrowers along observable dimensions. Furthermore, we find no evidence that either result was driven by a collapse in demand for funds. Our results are consistent with an investor-perceived reduction in default probabilities; and suggest that liftoff provided a strong, positive signal about the future solvency of subprime borrowers, reducing their borrowing cost, even as short term rates increased in other markets.
- Keywords: peer-to-peer lending, subprime consumer loans, Fed liftoff, monetary policy signaling, default channel, household debt.