Spillover Effects of Peer-to-Peer Lending on the Loan Losses of Commercial Banks

Abstract

Financial technology (FinTech) companies are increasingly important in the financial system. We 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 loan loss provisions of that state’s commercial banks. If P2P lending helps borrowers repay their bank loans, banks might report lower loan loss provisions. However, if P2P lending results in higher leveraged borrowers, banks might accrue higher loan loss provisions. Using a large sample of US single-state banks during 2009-2017, we find that banks in states where P2P lending volume is higher report higher loan loss provisions. This positive relation is stronger for banks with 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. We also find that P2P lending is associated with higher future loan charge-offs, which capture realized loan losses. Overall, our study offers new insights into the interaction between FinTech firms and traditional financial institutions.

Keywords: financial technology, peer-to-peer lending, overleveraging, commercial banks, loan losses

JEL Classification: G21, G23, G51, M41