Fed liftoff and subprime loan interest rates: Evidence from the peer-to-peer lending market

Arbeitspapier

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 demonstrate that this was not generated by a change in the composition of borrowers along observable dimensions. Furthermore, we find no evidence that either result was driven by a collapse in demand for funds. Our results 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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Sveriges Riksbank Working Paper Series ; No. 319

Classification and Topics

• Classification: Wirtschaft ; Household Saving; Personal Finance ; Interest Rates: Determination, Term Structure, and Effects ; Monetary Policy ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages
• Subject: peer-to-peer lending ; subprime consumer loans ; Fed liftoff ; monetary policy signaling ; default channel ; household debt

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Bertsch, Christoph ; Hull, Isaiah ; Zhang, Xin
• Event: Veröffentlichung
• (who): Sveriges Riksbank
• (where): Stockholm
• (when): 2016

Further information

• Handle: http://hdl.handle.net/10419/157962
• Last update: 10.03.2025, 11:44 AM CET