DOES PEER-TO-PEER LENDING SUBSTITUTE OR COMPLEMENT TRADITIONAL BANK LENDING? AN INVESTIGATION OF THE BONDORA PLATFORM IN ESTONIA, FINLAND, AND SPAIN

Abstract

Peer-to-peer (P2P) lending boomed in response to the tightened regulation and conservative lending practices that followed the 2008 financial crisis. While the quick, unmediated loans offered by P2P marketplaces have been hypothesized to expand credit access, the capacity of P2P lending to broaden credit availability depends on whether P2P lending substitutes or complements traditional bank lending. Previous research on this question has given little attention to the role of P2P lending in smaller European credit markets. In this thesis, I investigate how P2P lending fits into the European credit ecosystem by using data from Bondora, a European P2P lending platform, to determine if P2P lending substitutes or complements bank lending in Estonia, Finland, and Spain. Following Tang (2019), I exploit three regulatory shocks to bank credit to observe how migrating low-quality bank borrowers impact P2P lending in each country. To answer my research questions, I employ difference-in-differences analysis to evaluate how a negative shock to bank credit affects P2P loan volumes and originations, borrower quality distribution and frequency, defaults, and interest rates in each country. I find that P2P volumes and originations were not impacted by credit tightening events in Estonia and Finland but were significantly positively impacted by regulation in Spain. Focusing the remainder of my analysis on Spain, I show that low-quality borrowers drive the influx of new P2P loans. Additionally, I observe a significant increase in defaults and interest rates driven by incoming low-quality borrowers. My results are consistent with P2P lending substituting for traditional bank lending in Spain. While my thesis faces limitations, I contribute to the literature by providing some of the first data points on whether P2P lending substitutes or complements bank lending in Estonia, Finland, and Spain.