Peer to peer lending : a (financial stability) risk perspective

The aim of this paper is to discuss P2P lending, a subcategory of crowdfunding, from a (financial stability) risk perspective. The discussion focuses on a number of dimensions such as the role of soft information, herding, platform default risk, liquidity risk, and the institutionalization of P2P markets. Overall, we conclude that P2P lending is more risky than traditional banking. However, it is important to recognize that a constant conclusion would be misleading. P2P platforms have evolved and changed their appearance markedly over time, which implies that although our final conclusion of increased riskiness through P2P markets remains valid over time, it is based on different arguments at different points in time. In addition, we discuss that acting on P2P online platforms satisfies most possible definitions of shadow banking and shows significant similarities with many observed aspects of shadow banking. We thus infer that P2P lending can be considered part of the shadow banking sector.