Lending Market Research Articles

Like a Moth to a Flame: Does the Stock Market Exacerbate Credit Risks of Peer-to-Peer (P2P) Lending?

In this paper, we establish a causal link between fluctuations in the stock market and credit risks from the P2P lending market, by exploring information of more than 450 thousand loans on Renrendai.com, a leading Chinese P2P crowd lending platform. Based on the fact that retail investors exhibit a disproportional level of attention when the Shanghai Stock Exchange (SSE) composite index is above the 3,500 threshold, we find that both the default rate and the degree of delinquency have a disproportional jump for P2P loans borrowed above the 3,500 threshold of the SSE composite index. This effect is more pronounced when the loan quality is lower and when investors are more overconfident. Furthermore, when the SSE composite index exceeds 3,500, the overall creditworthiness of borrowers disproportionally deteriorates, indicated by higher interest rates, longer fulfill time needed to achieve the target loan amount, lower credit scores, and lower loan amounts. Overall, our results suggest that FinTech developments could amplify financial risks and hamper financial stability.

УДОСКОНАЛЕННЯ РОЗВИТКУ СИСТЕМИ КРЕДИТНИХ СПІЛОК УКРАЇНИ

Theoretical and practical recommendations for improving the functioning of credit unions in Ukraine are offered. It is determined that to increase the competitiveness of credit unions need to: change their organizational structure and risk management in accordance with the conditions of the rural economy; Participate in regional and national initiatives that can grow into cooperatives, implement at the state and regional levels of stabilization and financial recovery of credit unions, create a system of insurance and guarantee deposits from financial risks, initiate the creation of credit bureaus to form a single database of borrowers, which will reduce the share of overdue and non-performing loans. The need to accelerate the process of forming strong associations, the activities of which will contribute to the development and implementation of uniform rules of conduct in the cooperative lending market, professional and technological standards of credit unions, raising the image and confidence in credit unions; to make one of the priority directions of development of organizational integration the formation of a single self-regulatory organization of credit unions in the form of an allUkrainian association of unions. It is proposed to intensify the introduction of the latest financial instruments, in particular such as savings certificates. Proven need to allow credit unions to raise funds on deposit accounts through the sale of savings certificates, these financial services for credit unions are currently unavailable and are not used in practice. It is necessary to open access for unions to foreign exchange transactions, which will contribute to the accumulation of additional assets, to form service infrastructure institutions that should provide services to credit unions. It is established that one of the main priorities for the development of credit cooperation in Ukraine is to gain a competitive position in the financial services market and ensure quality service to members of credit unions by expanding the range of financial services and ensuring their reliability.

Gamestonk: What Happened and What to Do about It

The price of GameStop stock exploded from $18.84 at the end of 2020 to a high of $483 on January 28, 2021, before collapsing to under $60 in early February. The stock had long been heavily shorted even before the pandemic. A stock bubble and its collapse inflict collateral damage even on those not participating in the bubble, including index-fund investors. The incident raises questions about the duties of brokers and financial service professionals in the age of social media, and the role of payment for order flow (PFOF). The price dislocation in GameStop highlights several leaks in the plumbing of the US equity market that need to be plugged or else similar dislocations will happen again. The antiquated T+2 settlement cycle needs to be shortened to reduce risk and attendant collateral needs in the system. Institutional short positions should be disclosed on SEC Form 13F just as long positions are. The frequency of short interest disclosure should be increased to daily from the current biweekly. The SEC should implement the Congressional mandate in Dodd-Frank §894 to increase transparency in the stock lending market by implementing a ticker tape for stock lending transactions. Short positions should be marked to market yearly for tax purposes yearly to eliminate the tax incentive to delay covering short positions. SEC rules 204 and 15c3-3 need to be modernized to help prevent spikes in prices far beyond any reasonable levels. Rule 606 should be extended to require brokers to report retail execution quality.

СЕК'ЮРИТИЗАЦІЯ ІНФРАСТРУКТУРНИХ ПРОЄКТІВ: СУТНІСНІ ХАРАКТЕРИСТИКИ ТА ОСНОВИ ОРГАНІЗАЦІЇ

Recently, the growing trends in the development of project financing mechanisms which are focused on the use of stock market instruments. Such trends are explained by an increase in interest in new financial technologies that being infiltrated into various spheres of economic activity and reduced the existing barriers to entry into the market of infrastructure projects by institutional investors. In the early stages of development, securitization was viewed as a transaction to write off assets from the balance sheet of banks. However, later the approaches to the definition of securitization have been changed. Such changes are caused by the development of financial technologies and the intensification of activities in the mortgage lending market. Nowadays, the approaches of scientific researchers to the interpretation of securitization do not differ significantly. Discrepancies relate to clarifications related to the pragmatic nuances of the implementation of this financial technology. Based on the generalization of various approaches to disclosing the essence of the conceptual apparatus of the definition of "securitization", the main features of the securitization of infrastructure projects as a financial technology aimed at minimizing credit risks by converting non-current assets into a liquid form by issuing securities are identified. In the features of securitization of infrastructure projects by types of infrastructure assets, by types of securities and by types of issuers of infrastructure liabilities are proposed. The meaning of the term "infrastructure bonds" has been revealed and the features inherent in infrastructure bonds are investigated. The study of foreign experience made it possible to identify the features of infrastructure bonds, which made it possible to substantiate the elements of a mechanism for bond financing of securitized infrastructure projects. Financial instruments of protection against credit risk have been investigated. In particular, these apply to insurance contracts, guarantees or credit default swaps. The financial schemes for the implementation of the securitization mechanism, including classical, synthetic, accumulative schemes have been considered.

Belarusian case study of P2P lending market digitalization: state-of-the-art, needs and perspectives

The paper investigates the present state and prospects of development of the Belarusian market of mutual lending, the business model and the results of the activity of KUBYSHKA crowdlending Internet platform, the possibilities of organizing cooperation between Belarusian banks and crowdlending platforms, obstacles to the development of the market for mutual lending.

Factors of the fintech market development in the global economy (the case of the alternative lending)

Alternative lending is one of the largest segments of the financial technology market in the world which is represented by online platforms specializing in organizing the lending process. The purpose of the article is to assess the impact of key factors on the dynamics of venture capital investments in alternative lending platforms. The objectives of this study are to define the concept of alternative lending, build an econometric model to analyze the factors of development of alternative lending in the world, and interpret the results from the point of view of the prospects for the development of alternative lending. Alternative lending has been defined as a segment of the fintech market that can be characterized as parallel financing of economic activities based on digital platforms through the provision of syndicated loans after decentralized business models. To test the hypotheses of the study, an econometric model was built on the analysis of 5,234 investment transactions completed in the period from 2013 to 2019 in 35 countries of the world and included in the CrunchBase database. According to the model, such factors as the availability of venture capital, the number of workforce, the digital competitiveness of the economy (the factor of future readiness), and the availability of credit information have a significant impact on the dynamics of direct and venture capital investments in alternative lending companies. The obtained results can be considered when improving the national strategy for regulating the alternative lending market, which is especially important for Russia, where the segment of alternative lending is at the stage of stagnation.

The main problems and current trends in the development of the mortgage lending market in Russia

The main problems and current trends in the development of the mortgage lending market in Russia

The Welfare Effects of Law Enforcement in the Illegal Money Lending Market

The Welfare Effects of Law Enforcement in the Illegal Money Lending Market

Counterparty Default Risk and Monetary Policy in Unsecured Interbank Lending Markets

Banks bargain over the cost of unsecured loans in a model of interbank lending markets characterized by counterparty default risk. The risk an individual bank defaults depends on both idiosyncratic and aggregate factors and impacts loan rates and participation in the interbank loan market. After a deterioration of the aggregate factor affecting default risk, participation in interbank lending markets declines, and both individual and the average interbank loan rates rise. The model suggests that some policy actions enacted during the late-2000s financial crisis may have reduced participation and increased spreads in unsecured interbank loan markets.

Тенденции и риски развития рынка Финтех в странах Азиатско-Тихоокеанского региона на примере альтернативного кредитования

The article attempts to identify and systematize trends and risks in the development of the alternative lending market in the countries of the Asia-Pacific region. Alternative lending as a segment of financial technology market (Fintech) in Asia has significantly increased its share in the global market over the past 5 years. During the period from 2017 to 2018, the share of Asia-Pacific countries increased in all 4 key Fintech segments. The research methodology is based on the methods of statistical data analysis, comparative analysis and correlation analysis. As a result of the analysis, the author identifies three main trends: an increase in the level of internationalization of alternative lending, an increase in the role of large technology companies (BigTech) in providing financial services to the population, and outsourcing of storage and client data processing to third parties. Along with these trends, new emerging risks may have an impact on financial stability in Asian countries: the risk of spillover onto other participants in the financial sector, procyclicality and the risk of moral hazard for systemically important organizations, etc. The author comes to the conclusion that in order to minimize the effects of fraud risk as well as other key risks, it is worth introducing a special regime regulating alternative lending in the country.

The failure of Chinese peer-to-peer lending platforms: Finance and politics

We investigate the influence of financial and political factors on peer-to-peer (P2P) platform failures in China's online lending market. Using a competing risk model for platform survival, we show that large platforms, platforms with listed firms as large shareholders, and platforms with better information disclosure were less likely to go bankrupt or run off (platform owners abscond with investor funds). More importantly, failing platforms were much less likely to run off in advance of major political events, but more likely to declare bankruptcy or run off after such events. These effects are more pronounced for politically connected platforms, platforms operating in provinces where local officials have close ties with central government, and in provinces with better local financial conditions. Our study highlights the role of political incentives on government regulatory intervention in platform failures.

Distinctive features of student borrowers and suboptimal investor decision‐making: Evidence from the P2P lending market

AbstractThis study attempts to identify the characteristics and behavioral features of student borrowers, and to investigate how well individual investors incorporate the uniqueness of these borrowers in their funding decisions. We find that student borrowers are distinct from other types of borrowers, not only with respect to factors that existed prior to joining the market, but also in terms of information generated during loan requests, subsequent cancellation behavior, repayment performance, and even in the composition and predictive accuracy of loan repayment models. However, individual investors are not fully aware of the unique attributes of student borrowers in their funding decisions.

Bursting the Auto Loan Bubble in the Wake of COVID-19

Before the COVID-19 pandemic, auto loans outstanding in the United States had soared to record highs. The boom in lending spanned new and used cars and traditional and subprime loans. With loan delinquencies also hitting new highs almost every quarter, predictions that the auto lending market could burst soon abounded. When the economy came to a grinding halt and unemployment skyrocketed in the wake of the pandemic, auto lenders knew they were facing a crisis. Throughout 2020, auto lenders granted more payment forbearances to consumers, while slashing interest rates on new loans. Auto manufacturers similarly made promises to buyers, such as the ability to return new cars for up to a year upon job loss. Combined with the CARES Act’s relief rebates and moratoria, the bottom did not fall out of the auto loan market.These measures, however, are temporary. The pandemic alone will not reduce people’s need for cars, but it will burst the auto loan bubble. The economic fallout will require interventions in the auto sale and loan markets, which presents a moment to transform America’s car economy. This symposium essay details a range of financial and related measures that can be implemented in the near future to shift auto financing away from promoting economically unequal and environmentally unfriendly use and access to automobiles, and, more broadly, to shift the United States away from prioritizing automobiles as the primary means of personal transportation.

Top management evaluation in Italian food and beverage industry

PurposeThe purpose of this paper is to present and discuss a model to evaluate the top management quality and its impact on the default probability/survival probability of companies operating in the Italian food and beverage industry. The focus is on SMEs and private companies (ie. companies with no external or public rating). The general aim of this paper is to initiate a new field of research enjoying the fast and growing number of information underlying the development of the private lending market (both banking channel and private debt channel) and the recent developments in assessing the managerial styles of leadership.Design/methodology/approachThe methodology used in the research is a mixed method based on quantitative and qualitative analysis. The authors have followed the sequential mixed methods design (Creswell and Plano Clark, 2007; Almalki, 2016) belonging to a practice perspective (Tashakkori and Creswell, 2007). The two components (quantitative and qualitative) are integrated in the combined approach: a final proposed evaluation model is explained and discussed.FindingsAccording to the experience (and private market best practice) the leadership style has a material impact on the survival probability of a company (and, on the contrary, on the default probability of a company). In other words, the leadership style – other variables be equal – can provide significant information to investors about the future evolution of the financial performance and related credit risk. In the paper, the authors provide a useful model (and tool) in order to capture the above mentioned relationship to support investment decisions in food and beverage industry.Research limitations/implicationsWhile a positive relationship between a participative style of leadership and the financial performance is widely accepted in the literature; there is no published research on the relationship between managerial styles of leadership and default probability/survival probability. There are several workstreams to be performed in future research in order (1) to provide more business evidence and (2) to extent the analysis to further industries (other than food and beverage). The first step is to collect more data and company information on managerial styles of leadership and to start to track, to measure and monitor the evolution of the credit risk over time in each of the four clusters identified in the combined model.Practical implicationsThe practical implication is to provide a methodological contribution to develop an evaluation model of top management quality to be used for the certification of the quality system. The proposed evaluation model is intended to support both (1) the ISO quality management system certifiers and (2) financial analysts and auditors in order to assess the going concern and the business sustainability and (3) the credit risk assessment and evolution in investment decisions.Social implicationsThe authors believe that a more deep understanding on the effectiveness of managerial styles of leadership on credit risk can improve the credit and investment allocation and to enhance the borrowing capabilities of the food and beverage industry (with relevant implications on number of employees and size of new investments).Originality/valueThis is the first applied research on the link between the default probability/company survival probability and the quality of management in the Italian food and beverage industry.

Born in Crisis: Early Impact of COVID-19 Pandemic on P2P Lending Market

This paper empirically investigates the impact of COVID-19 pandemic on liquidity risk incurred by peer-to-peer (P2P) lending market. As the COVID-19 pandemic adversely affects the financial markets, there is a need for better understanding of the dynamics of successful P2P lending under the conditions of financial distress. Using the secondary market listings dataset of Bondora P2P lending platform based in Estonia, we provide evidence of the pandemic induced exposure to liquidity risk in P2P lending market. Despite increased volatility in the financial markets, the results show that COVID-19 risk increases the probability of successful listing during the period of a pandemic. Further analysis shows that there is a negative association between COVID-19 risk and share of overdue loans and average overdue days in the secondary market listings. Our results are robust to sample selection bias through Heckman two-stage regression models and bootstrapping. The findings of this study imply certain early tendencies in the financial market during the pandemic induced turmoil and open broad room for further research.

Safe-Asset Shortages: Evidence from the European Government Bond Lending Market

AbstractWe identify the unique role of the government bond lending market in collateral transformation during periods of market stress. Using a novel database, we provide evidence that safe assets in the lending market have higher demand, higher borrowing cost, and higher usage of noncash collateral relative to nonsafe assets during stressed market conditions. Moreover, we find that market participants are able to obtain safe assets using relatively low-quality noncash collateral, allowing for collateral transformation. We show that policy interventions by central banks can help reduce safe-asset shortages by returning sought-after safe assets to the market.

Designing Dealer Compensation in the Auto Loan Market: Implications from a Policy Experiment

We study the design of dealer compensation policy in the indirect auto lending market, where most lenders give dealers the discretion to mark up interest rates. To protect consumers from potential discrimination by the dealer discretion, several banks switched to a new compensation scheme by fixing the markup as a percentage of the loan amount. We document that the market share of these banks responded positively (negatively) in the consumer segment where the policy increased (decreased) the interest rate — a reversal of the usual demand curve — which highlights the influence of dealers on the bank choice for financing loans. Accordingly, we develop and estimate an empirical model that allows for dealer–consumer bargaining, which depends on both the dealers' and the consumers' utility. Based on the estimation results, we explore alternative compensation policies that also eliminate dealers' discretion. We show that a lump-sum compensation that pays dealers a fixed dollar amount per loan dominates the current policy for the banks in terms of gaining market share. This is because dealers' equivalent markup rates would better align with their bargaining power. Our study highlights the importance of accounting for the interests and bargaining power of middlemen in designing a compensation scheme.

Bargaining over loan contracts with signaling

AbstractThis paper combines a sequential bargaining game between an enterprise and a fixed number of banks with a signaling game through which the enterprise reveals her project quality as well as her market‐speed on the lending market. We characterize subgame‐perfect Nash equilibrium loan contracts that are supported by separating perfect Bayesian equilibria in the signaling game. In contrast to existing models of lending markets, low‐quality investment projects might be rewarded with more favorable equilibrium loan contracts than high‐quality projects. Also in contrast to existing models, an increase in the competitive pressure between banks reduces the aggregate welfare in our model. The reason is that more favorable loan conditions come with a greater incentive for the ‘strong’ entrepreneur to distinguish herself from her ‘weak’ counterpart through socially wasteful signaling costs.

Reconsidering Creditor Governance In A Time Of Financial Alchemy


 
 
 For many years corporate lenders have been a crucial force in the boardroom, providing a check on management and con- tributing to firm governance. However, as this Article docu- ments, lenders’ influence has receded in recent years for a large and important class of corporate borrowers. The culprit is a familiar one in a less familiar guise: the sale of loans by origi- nating banks for securitization—like that which gained noto- riety with pre-financial crisis mortgage-backed securities, but now are deployed in the market for corporate loans. As this Ar- ticle points out, the shift from relationship lending to arms- length securitization has the potential to intensify moral haz- ard, leading banks to provide less monitoring for their highly securitized clients. Recent data supports this narrative of debt governance dereliction with potentially enormous conse- quences: it heralds the disappearance of an important source of fiscal discipline and governance at a moment when U.S. cor- porations carry more debt than at any time in history (totaling half of U.S. gross domestic product), and an economic crisis threatens to expose companies whose debt has been poorly managed.
 
 
 
 This Article presents a theoretical and empirical examina- tion of the dramatic change in creditor corporate governance and its implications. It shows how the diminishment of lend- ers’ role in governance is a predictable result of a confluence of forces in the financial markets, in particular, the use of struc- tured finance to securitize loans, which in turn has driven a lending market with diminishing checks on borrower profli- gacy. It also shows how this new market is weakening govern- ance norms in ways that are harmful to borrowing companies, lenders, and society as a whole.
 The Article makes two contributions to the literature. First, it empirically documents the decline of lenders’ corporate gov- ernance interventions, cataloging original data on all borrower loan covenant violations—a primary mechanism by which lenders intervene in governance—from 2008 through 2018. Second, although many scholars have written about lenders’ role in corporate governance and securitization separately, this Article brings the two together. It thereby adds a missing com- ponent to an important literature by showing how corporate governance and the financial system affect each other, and pro- posing solutions to bolster both.
 
 
 
 
 

ІНТЕГРАЛЬНЕ ОЦІНЮВАННЯ РИЗИКІВ УКРАЇНСЬКОГО РИНКУ ІПОТЕЧНОГО КРЕДИТУВАННЯ

Стаття присвячена дослідженню підходів до класифікації ризиків на ринку іпотечного кредитування України. Встановлено наявність взаємодоповнюючих поглядів на систематизацію ризиків, що дозволило запропонувати новий ракурс класифікації – розподіл ризиків іпотечного кредитування на раціональні та ірраціональні. Виокремлено найбільш вагомі ризики українського ринку іпотечного кредитування: кредитний ризик, інвестиційний ризик, інституційний ризик, інфляційний ризик, ризик незавершеного будівництва. Запропоновано авторська методика розрахунку інтегрального показника оцінки ризиків на ринку іпотечних кредитів через множення відносних коефіцієнтів (відношення показників національного ринку до відповідних показників європейського ринку).