XXV Edition

1-2 December 2016"

Fed Liftoff and Subprime Loan Interest Rates: Evidence from the Peer-to-Peer Lending Market

Bertsch Christoph, Sveriges Riksbank
Hull Isaiah, Sveriges Riksbank
Zhang Xin, Sveriges Riksbank

On December 16th of 2015, the Fed initiated “liftoff,” raising the federal funds rate range by 25 basis points and ending a 7-year regime of near-zero rates. We use a unique dataset of 640,000 loan-hour observations to measure the impact of liftoff on interest rates in the peer-to-peer lending segment of the subprime market. We find that the average interest rate dropped by 16.9-22.6 basis points. This holds for 14 and 28 day windows centered around liftoff, and is robust to the inclusion of a broad set of loan-level controls and fixed effects. We also find that the spread between high and low credit rating borrowers decreased by 16%; and reject a number of candidate explanations for these results, including a change in borrower composition, a collapse in demand, and a shift in risk appetite. Our findings are consistent with an investor-perceived reduction in default probabilities; and suggest that liftoff provided a strong, positive signal about the future solvency of subprime borrowers, reducing their borrowing cost, even as short term rates increased in other markets. (JEL D14, E43, E52, G21)

Area: Monetary Policy and Central Banking

Keywords: peer-to-peer lending, subprime consumer loans, Fed liftoff, monetary policy signaling, default channel, household debt

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