Fed Liftoff and Subprime Loan Interest Rates: Evidence From the Peer-to-Peer Lending Market

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The Working Paper series presents reports on matters in the sphere of activities of the Riksbank that are considered to be of interest to a wider public. Terms of use: Documents inThe papers are to be regarded as reports on ongoing studies and the authors will be pleased to receive comments.The opinions expressed in this article are the sole responsibility of the author(s) and should not be interpreted as reflecting the views of Sveriges Riksbank. Fed Liftoff and Subprime Loan Interest Rates:Evidence from the Peer-to-Peer Lending Market * Christoph Bertsch Sveriges RiksbankIsaiah Hull Sveriges RiksbankXin Zhang Sveriges RiksbankSveriges Riksbank Working Paper Series No. 319 April 2016Abstract On December 16th of 2015, the Fed initiated "liftoff," raising the federal funds rate range by 25 basis points and ending a 7-year regime of near-zero rates. We use a unique dataset of 640,000 loan-hour observations to measure the impact of liftoff on interest rates in the peer-to-peer lending segment of the subprime market. We find that the average interest rate dropped by 16.9-22.6 basis points. This holds for 14 and 28 day windows centered around liftoff, and is robust to the inclusion of a broad set of loan-level controls and fixed effects. We also find that the spread between high and low credit rating borrowers decreased by 16% and demonstrate that this was not generated by a change in the composition of borrowers along observable dimensions. Furthermore, we find no evidence that either result was driven by a collapse in demand for funds. Our results are consistent with an investor-perceived reduction in default probabilities; and suggest that liftoff provided a strong, positive signal about the future solvency of subprime borrowers, reducing their borrowing cost, even as short term rates increased in other markets. (JEL D14, E43, E52, G21)

BigTech and the changing structure of financial intermediation

“… BCBS (2018).15 To give one example, for FinTech loans,Bertsch et al (2016) find that in December 2015, Fed lift-off in the US was associated with lower interest rates in the following hours, as it provided a positive signal about future borrower solvency.…”

The Short-Run Effect of Monetary Policy Shocks on Credit Risk: An Analysis of the Euro Area

“…There is growing evidence in the literature on this adverse response of credit conditions of the private sector following a monetary policy shock during the crisis period. For instance, Bertsch, Hull, and Zhang (2016) show that the liftoff of the Fed on December 16, 2015, led to an increase in the credit supply for households. 9 They explain this phenomenon by the fact that an increase in the federal funds rates following a long lasting low interest rate environment may have provided a positive signal regarding the future solvency of the borrowers.…”

Implications of Platform Finance on Monetary Policy Transmission

“…There is a growing literature on this kind of decentralized platform finance, with particular attention paid to the role of signals and the extent of asymmetric information in the formation of platform loans (see, for instance, Freedman andJin 2011, 2017;Bertsch et al 2016;Iyer et al 2016;Duarte et al 2012). Closer to us is Faia and Paiella (2019), who work out a dynamic general-equilibrium model with borrowers and lenders who can turn either to conventional or platform finance to study the link between information and platform interest rates.…”