Risk management in peer-to -peer lending markets

Abstract

The current mainstream peer-to-peer online lending platforms have two types of business models: 1. the platform serves as an information intermediary to provide matching services for both lenders and borrowers. In this capacity, the platform is not responsible for losses caused by any default events. The profits of the platform are generated from the service fees collected from the lenders and borrowers. 2. The platform cooperates with the third-party guarantee company. While the platform matches the lenders and borrowers, the third-party guarantee company promises to cover all (or partial) expected losses on all outstanding loans (loss given default). The platform and insurer make profits, respectively, from the service fees and insurance premium paid by the lenders and borrowers. Major lending platforms in the United States, United Kingdom, and South Korea adopt the first model, while the Chinese platforms have followed the second business model.

This dissertation aims to investigate the implications of the differences between the above two business models on the systemic risk in the peer-to-peer lending markets. More specifically, I have developed two-sided market models to capture the interaction between lenders, borrowers, platforms and insurers. Next, I plan to quantify the equilibrium service fees, insurance premium, peer-to-peer interest rates, lending amounts under these two business models. Then, based on the equilibrium states, I will examine the moral hazard caused by the presence of the insurers in the peer-to-peer market and analyze the systemic losses incurred by a loan default. Finally, I will draw policy implications from the analytical results.