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, 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.