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

Author

Listed:
  • Bertsch, Christoph

    (Research Department, Central Bank of Sweden)

  • Hull, Isaiah

    (Research Department, Central Bank of Sweden)

  • Zhang, Xin

    (Research Department, Central Bank of Sweden)

Abstract

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 lifto 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.

Suggested Citation

  • Bertsch, Christoph & Hull, Isaiah & Zhang, Xin, 2016. "Fed Liftoff and Subprime Loan Interest Rates: Evidence from the Peer-to-Peer Lending Market," Working Paper Series 319, Sveriges Riksbank (Central Bank of Sweden).
    • Handle: RePEc:hhs:rbnkwp:0319
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    File URL: http://www.riksbank.se/Documents/Rapporter/Working_papers/2016/rap_wp319_160422.pdf
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    Cited by:

    1. Chi Hyun Kim & Lars Other, 2019. "The Short-Run Effect of Monetary Policy Shocks on Credit Risk: An Analysis of the Euro Area," Discussion Papers of DIW Berlin 1781, DIW Berlin, German Institute for Economic Research.
    2. Jon Frost & Leonardo Gambacorta & Yi Huang & Hyun Song Shin & Pablo Zbinden, 2019. "BigTech and the changing structure of financial intermediation," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 34(100), pages 761-799.
    3. Faia, Ester & Pagel, Michaela, 2017. "P2P Lending: Information Externalities, Social Networks and Loans Substitution," CEPR Discussion Papers 12235, C.E.P.R. Discussion Papers.
    4. Chin‐Yoong Wong & Yoke‐Kee Eng, 2020. "P2P finance and the effectiveness of monetary controls," Manchester School, University of Manchester, vol. 88(4), pages 617-639, July.

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    More about this item

    Keywords

    peer-to-peer lending; subprime consumer loans; Fed liftoff; monetary policy signaling; default channel; household debt;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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