Peer-to-Peer Lending and Bank Risks: A Closer Look

Abstract

This study examined how the expansion of peer-to-peer (P2P) lending affects bank risks, particularly insolvency and illiquidity risks. We compared a benchmark case wherein banks are the only players in the loan market with a segmented market case wherein the loan market is segmented by borrowers' creditworthiness, P2P lending platforms operate only in the low-credit market segment, and banks operate in both low- and high-credit segments. For the segmented market case compared with the benchmark one, we find that, while banks' insolvency risk increases, their illiquidity risk decreases such that their overall risk also decreases. Our results imply that sustainable P2P lending requires an appropriate differentiation of roles between banks and P2P lending platforms-P2P lending platforms operate in the low-credit segment and banks' involvement in P2P lending is restricted-so that the growth of P2P lending is not adverse for bank stability.