Loan Loss Signaling Among Banks Competing with FinTech Firms: Evidence from Peer-to-Peer Lending

Abstract

Financial technology (FinTech) companies are increasingly important to the financial system. We investigate the effect of peer-to-peer (P2P) lending on traditional banks by examining whether and how P2P lending activity in a state affects loan loss provisions among that state’s commercial banks. When borrowers take out loans from both a bank and a P2P lending platform, they become more leveraged. Banks may signal their anticipation of bad loans due to overleveraged borrowers by increasing their expected future loan losses. Using a large sample of US single-state banks from 2010 to 2018, we find that banks in states with a higher P2P lending volume report higher loan loss provisions. This positive relation is stronger for banks with greater exposure to the consumer loan market and for those with consumer borrowers who are more leveraged. Our findings show that bank managers use loan loss provisions to signal expected credit losses in response to P2P lending. We also find that P2P lending is associated with higher future loan charge-offs, which validates the signaling channel. Overall, our study offers new insight into the interaction between FinTech firms and traditional financial institutions.

Keywords: financial technology; peer-to-peer lending; overleveraging; signaling; loan loss provisions

JEL Classification: G21, G23, G51, M41