What Does Peer-to-Peer Lending Evidence Say About the Risk-taking Channel of Monetary Policy?

Abstract

This paper uses loan application-level data from a peer-to-peer lending platform to study the risk-taking channel of monetary policy. By employing a direct ex-ante measure of risk-taking and estimating the simultaneous equations of loan approval and loan amount, we are the first to provide quantitative evidence of the impact of monetary policy on the risk-taking of nonbank financial institution. We find that the search-for-yield is the main workhorse of the risk-taking effect, while we do not observe consistent findings of risk-shifting from the liquidity change. Monetary policy easing is associated with a higher probability of granting loans to risky borrowers and a greater riskiness of credit allocation, but these changes do not necessarily relate to a larger loan amount on average.The risk-taking channel of monetary policy has attracted more attention since the global financial crisis. A low interest rate and lax monetary environment have been accused of giving rise to the higher risk preference of financial institutions, which was at the root of the financial tsunami (Adrian . This channel, if it holds true, implies that monetary policy goes far beyond the traditional impact on price stability and economic growth; it also has implications for systemic risk and financial stability (Borio and White 2004, Issing 2003, Smets et al. 2014, Stein 2012. Expansionary monetary policy can result in the increase of credit quantity (Gambacorta and Marques-Ibanez 2011, Kashyap and Stein 2000) as well as the decrease in credit quality Zhu 2012, Jiménez et al. 2014). Therefore, the relationship between monetary policy and macroprudential management becomes more convoluted and challenges the policymakers. The answers to the question of whether and how monetary policy affects risk-taking are pivotal to the policy discussion and of great academic interest.This paper studies the risk-taking channel of monetary policy based on the evidence from peer-to-peer (P2P, henceforth) lending. Specifically, we intend to answer the following three questions. First, whether the P2P platform's risk tolerance increases through higher probabilities and larger loan amounts to riskier borrowers when monetary policy eases. Second, what is the mechanism behind the risk-taking channel. In particular, this study investigates whether the search-for-yield and funding liquidity play a role in the risk-taking channel. Third, the tightening of regulation policy for the P2P industry in China provides a good experiment to study whether the financial regulation policies can curb the increased risk-taking during the expansionary monetary policy period.Using loan application-level data, we establish new evidence for the risk-taking channel of monetary policy. The main findings are threefold. To begin, a financial institution tends to take more risks when monetary policy eases by lending to riskier borrowers. Meanwhile, the impact of the increased funding liquidity in the liability side on risktaking is ambiguous. In addition, stricter regulation is effectiv...

Linguistic errors and investment decisions: the case of ICO white papers

“…As such, we go beyond its use as a control or composite variable and study the value-relevance of linguistic errors in a financial context. It must also be noted that our focus on ICOs significantly contrasts with the P2P crowdfunding setting used by Gao et al (2021), where the platform provides guarantees to investors and, therefore, takes the investment risk (Huang et al 2021a). 4 On the contrary, in the context of ICOs, participants are not lenders, but investors in tradable securities who bear the risk of their decisions.…”

“…In fact,Huang et al (2021a) discuss that P2P individual lenders do not observe the loan listings, nor make loan decisions.…”