Microbanks in Online Peer-to-Peer Lending: A Tale of Dual Roles

Abstract

Empirical research has shed little light on the nature of bank formation as a banking behavior in an unregulated setting, due to the lack of observational data. On the other hand, recent years have witnessed the increasing popularity of peer-to-peer lending platforms which connect borrowers to lenders. An interesting observation is that some users are conducting micro banking activities, freely performing dual roles as both borrowers and lenders. They are referred to as microbanks. The microbanks face few regulatory restrictions or supervisory powers. Seizing this opportunity, we empirically examine the dynamics of free entry behaviors, using a sample of unregulated microbanks from one of the largest online peer-to-peer lending platforms in China. In particular, we explore the formation of microbanks at monthly intervals. Further, we create a quasi-experiment by leveraging the fact that the exact date to receive a repayment is exogenous to the microbanks. We find that a positive liquidity shock is positively associated with microbank formation.