Spillover effect of peer-to-peer lending on the loan losses of commercial banks

Abstract

Financial technology (FinTech) companies play an increasingly important role in the financial system. I investigate the effect of peer-to-peer (P2P) lending on traditional banks' loan losses by examining whether and how P2P lending activity in a state affects the expected loan losses of the commercial banks within the state. If P2P lending provides borrowers with another source of funding to repay their bank loans, banks might report less expected loan losses. However, if P2P lending results in higher leveraged borrowers, banks might report more expected loan losses. Focusing on a large sample of US single-state banks during 2009­2017, I find that banks in states where P2P lending volume is higher report higher loan loss provisions. I also find that this positive relation is stronger for banks that have greater exposure to the consumer loan market and for banks whose consumer borrowers are already more leveraged. These findings support the overleveraging effect of P2P lending on banks' consumer borrowers. In a supplementary test, I find evidence that P2P lending is associated with higher future loan charge-offs, which capture realized loan losses. Overall, my study offers new insight into the interaction between FinTech firms and traditional financial institutions.