P2P Lenders versus Banks: Cream Skimming or Bottom Fishing?

We develop a simple theoretical model to motivate testable hypotheses about how P2Pplatforms compete with banks for loans. The model predicts that (i) P2P lending grows when some banks are faced with exogenously higher regulatory costs; (ii) P2P loans are riskier than bank loans; and (iii) the risk-adjusted interest rates on P2P loans are lower than those on bank loans. We confront these predictions with data on P2P lending and the consumer bank credit market in Germany and find empirical support. Overall, our analysis indicates the P2P-lenders are bottom fishing when regulatory shocks create a competitive disadvantage for some banks.