“Bank Misconduct, Trust, and Online Lending” with Isaiah Hull (Sveriges Riksbank), Yingjie Qi (Stockholm School of Economics) and Xin Zhang (Sveriges Riksbank)
- Abstract:
We study the impact of trust on the expansion of online lending in the U.S. over the 2008-2016 period. Using nearly complete loan and application data from the online lending market, we demonstrate that a misconduct-driven decline of trust in traditional banking is associated with a statistically and economically significant increase in online lending demand at the state and county levels. Furthermore, we show that this e↵ect is strongest for low rated borrowers and weakest in states with high levels of generalized trust. We also examine generalized trust in isolation and show that it strengthens in-person, bank-based borrowing, reducing the demand for impersonal online lending. Finally, we 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.