Peer-to-Peer Lending Platforms and the Stability of the Banking System

21 Pages Posted: 30 Jul 2018

See all articles by Jooyong Jun

Jooyong Jun

Dongguk University; Bank of Korea - Economic Research Institute

Eunjung Yeo

Chung-Ang University

Date Written: July 29, 2018

Abstract

This study examines how the advent and the expansion of peer-to-peer(P2P) lending platforms affect financial stability, especially the soundness and the stability of banks and the banking system. We analyze the risks of various bank failures by comparing two cases of competition, a benchmark case in which only banks exist and no P2P lending platforms exist and the case in which the credit market is segmented and a P2P lending platform operates only in the low-credit score consumers’ markets. Our findings are as follows: (i) the insolvency risk of individual banks increases when they compete with the P2P lending platform in the low-credit score consumers’ markets, but (ii) the illiquidity risk of individual banks is reduced; and (iii) the systemic risk in the banking system triggered by individual defaults is also reduced. Our results imply that if the role of the P2P platforms and banks are properly differentiated so that P2P lending platforms focus on the provision of credits in the low-credit score consumers’ markets, and the banks concentrate more on high-credit score consumers’ markets and protected deposits business, the impact of spread of P2P lending platforms on the current banking system’s stability may be limited.

Keywords: peer-to-peer lending, direct finance, risk, banking, stability

JEL Classification: G21, G23, G28

Suggested Citation

Jun, Jooyong and Yeo, Eunjung, Peer-to-Peer Lending Platforms and the Stability of the Banking System (July 29, 2018). 31st Australasian Finance and Banking Conference 2018, Available at SSRN: https://ssrn.com/abstract=3221966 or http://dx.doi.org/10.2139/ssrn.3221966

Jooyong Jun

Dongguk University ( email )

30 Pildong-ro 1-gil, Jung-gu
Seoul, Seoul 04620
Korea, Republic of (South Korea)

Bank of Korea - Economic Research Institute ( email )

110, 3-Ga, Namdaemunno, Jung-Gu
Seoul 100-794
Korea, Republic of (South Korea)

Eunjung Yeo (Contact Author)

Chung-Ang University ( email )

221 Heuksuk-dong
Dongjak-gu
Seoul, 156-756
Korea, Republic of (South Korea)

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