Loan Loss Recognition 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. 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