“Bank Misconduct, Trust, and 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 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.