Future Forum | Bank of England

Does peer to peer lending pose a risk to financial stability?

Bekah Griffiths
Bekah Griffiths | 1 month ago | in Bank to the future

I just read that part of the reason for the decline in the Chinese car market is the collapse of some peer to peer lending platforms. I wonder to what extent these (all not just the ones in China) can replicate the efficiency of banks in terms of financial intermediation i.e. allocation the right funds to the right people, maturity transformation etc. They seem to be quite vulnerable to adverse selection i.e. unaware of the true risk that borrowers pose. The article on the Chinese P2P lenders I read bout said that about 1 in 4 have no ability to pay back. I realise that this could be idiosyncratic to the Chinese market and here it may be different, but how well are these platforms regulated? Im guessing theyre still pretty niche and probably represent a small part of the market but I wonder what effect they could have on financial stability

Shelley (BoE Moderator) 4 weeks ago

Thank you for your comment!

Cameron Penny 4 weeks ago

Bekah, this is a really good question. In terms of financial stability the Bank has given its view as recently as November 2018 when the Financial Policy Committee said "P2P lending is not likely to pose a threat to UK financial stability in the medium term, and has therefore removed P2P lending from its list of sectors it is monitoring closely." You can read more here: https://www.bankofengland.co.uk/-/media/boe/f...vember-2018.pdf

Also it's worth saying that since the 1 April 2014 the Financial Conduct Authority (FCA) has been responsible for regulating the consumer credit market and this includes P2P lending. The main trade body for P2P lenders (The Peer-to-Peer Finance Association) has been a proponent of disclosure which gives potential lenders and borrowers a better idea of the health of a specific P2P lending platform. Some platforms go further and default to auto-diversification whereby a lender's funds are split up amongst a number of borrowers thus also reducing the risk of total loss.

Overall, the continued development of the UK's P2P lending sector offers a potential alternative source of credit for some consumers and small businesses where retail banks cannot provide funds.

Bekah Griffiths 3 weeks ago

Thanks Cameron-I think we do a great job in the UK of keeping things safe, and the auto diversification is a great idea. I wonder if they are as well regulated in China? Im glad that the UK has done so much to make banks safer because if things do go pear shaped in China at least we'll have some degree of protection form the fallout (from a financial perspective at least as Im sure the economic consequences wouldnt be good for anyone.)