Forthcoming in the Journal of Banking and Finance: “Bank Misconduct and Online Lending”

“Bank Misconduct and Online Lending” with Isaiah Hull, Yingjie Qi and Xin Zhang, Journal of Banking and Finance (forthcoming)

  • Abstract: We introduce a high quality proxy for bank misconduct that is constructed from Consumer Financial Protection Bureau (CFPB) complaint data. We employ this proxy to measure the impact of bank misconduct on the expansion of online lending in the United States. Using nearly complete loan and application data from the online lending market, we demonstrate that bank misconduct is associated with a statistically and economically significant increase in online lending demand at the state and county levels. This result is robust to the inclusion of bank credit supply shocks and holds for both broader and more narrowly-defined bank misconduct measures. Furthermore, we show that this effect is strongest for lower rated borrowers and weakest in states with high levels of generalized trust. (A13, G00, G21, K00)
The figure shows the estimated difference in the P2P’s share of total debt between treated and control counties. The horizontal axis shows the number of months that have elapsed since a major banking scandal occurred in the treatment counties. The vertical axis shows the difference in the P2P’s share of total debt. We identify the date of bank scandals through the use of newspaper articles drawn from Factiva and CFPB enforcement actions. These events are also associated with sharp increases in the number of reported CFPB complaints.
  • Keywords: financial development, consumer loans, bank misconduct, FinTech.

New version of “Bank Misconduct and Online Lending”

“Bank Misconduct and Online Lending” with Isaiah Hull (Sveriges Riksbank), Yingjie Qi (Stockholm School of Economics) and Xin Zhang (Sveriges Riksbank)

  • Abstract:

We introduce a high quality proxy for bank misconduct that is constructed from
Consumer Financial Protection (CFPB) complaint data. We employ this proxy to
measure the impact of bank misconduct on the expansion of online lending in the
United States. Using nearly complete loan and application data from the online lending
market, we demonstrate that bank misconduct is associated with a statistically and
economically signi cant increase in online lending demand at the state and county
levels. This result is robust to the inclusion of bank credit supply shocks and holds for
both broader and more narrowly-de ned bank misconduct measures. Furthermore, we
show that this e ect is strongest for lower rated borrowers and weakest in states with
high levels of generalized trust.

  • Keywords: financial development, consumer loans, bank misconduct, FinTech.

New version of “Bank Misconduct, Trust, and Online Lending”

“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.

New working paper on “The Role of Trust in Online Lending”

“The Role of Trust in 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 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.

Revised version of Sveriges Riksbank Working Paper Series No. 319

“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)

  • Abstract:

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.

New paper on online lending and monetary policy; Sveriges Riksbank Working Paper Series No. 319

“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)

  • Abstract:

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.