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

68 Pages Posted: 1 Jul 2020 Last revised: 3 Jan 2022

See all articles by Jeffrey Ng

Jeffrey Ng

Hong Kong Polytechnic University - School of Accounting and Finance

Tjomme O. Rusticus

Hong Kong Polytechnic University - School of Accounting and Finance

Janus Jian Zhang

Hong Kong Baptist University (HKBU) – Department of Accountancy and Law

Date Written: December 2021

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. 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, consistent with banks recognizing expected higher loan losses from borrowers who might be overleveraged due to borrowing from P2P lenders. 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. We also find that P2P lending is associated with higher future loan charge-offs, which validates the notion that loan loss provisions reflects banks’ expectation of higher loan losses. Overall, our study offers new insight into how traditional financial institutions are affected by the rise of FinTech firms.

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

JEL Classification: G21, G23, G51, M41

Suggested Citation

Ng, Jeffrey and Rusticus, Tjomme O. and Zhang, Janus Jian, Loan Loss Recognition Among Banks Competing with FinTech Firms: Evidence from Peer-to-Peer Lending (December 2021). Available at SSRN: https://ssrn.com/abstract=3622854 or http://dx.doi.org/10.2139/ssrn.3622854

Jeffrey Ng

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

Tjomme O. Rusticus (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

Janus Jian Zhang

Hong Kong Baptist University (HKBU) – Department of Accountancy and Law ( email )

Hong Kong

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