P2P Lenders versus Banks: Cream Skimming or Bottom Fishing?

We derive three testable predictions from a bank-P2P lender model of competition: (a) P2P lending grows when some banks are faced with exogenously higher regulatory costs; (b) P2P loans are riskier than bank loans; and (c) the risk-adjusted interest rates on P2P loans are lower than those on bank loans. We test these predictions against data on P2P loans and the consumer bank credit market in Germany and find empirical support. Overall, our analysis indicates that P2P lenders are bottom fishing, especially when regulatory shocks create a competitive disadvantage for some banks. (JEL G21) Received June 9, 2020; editorial decision September 19, 2021 by Editor Andrew Ellul. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.