3 As shadow banks, platforms formed their own reserve funds by pooling money from lenders to hedge borrower default risks. For example, Ppdai reported to the US Securities and Exchange Commission (SEC) that it had a quality assurance fund and investor reserve funds (www.sec.gov/Archives/edgar/ data/1691445/000119312517309953/d285990df1.htm). These reserve funds were similar to the deposit insurance in the traditional banking sector. Lenders are exposed to less risk from borrower default under principal guarantee but face the possibility of platform collapse. If the platform fails, lenders cannot regain their principal. Many P2P platforms lacked professional risk management and sufficiently large reserve funds. Therefore, when there was a shortage of new investors or economic downturns, a small number of borrower default cases could quickly deplete the reserve funds and cause panic among lenders. As lenders lost confidence in the promise of principal guarantee, they started a “platform (bank) run” by withdrawing money from the platform. In addition, the relatively weak capacity of regulatory authority in China left room for fraud. The intense competition and investor naivety jointly further induce Chinese P2P platforms to choose the risky and unsustainable business model. Having a larger number of platforms also makes monitoring more difficult for the regulatory authority and therefore facilitates fraud. Figure 2 shows different reasons for platform collapse. A large proportion of failed platforms ceased operation for “normal” reasons such as liquidity problems, lack of investors, or failure to earn a profit. However, many platforms failed because of fraud. Among 6,292 events of platform collapse on record, 1219 (19.37\%) were caused by absconding by the owner(s) and 397 (6.31\%) were investigated by regulators for possible fraud such as Ponzi schemes and fabricating information about borrowers. Thousands of investors were exploited by these financial frauds. The existence of naïve investors further increases the incentive of platforms offering principal guarantee. Naïve investors hold the misperception that platforms always have the ability to fulfill the principal guarantee terms. Mandatory information disclosure can mitigate the problem only if the regulation can be successfully implemented to all possible options faced by investors. If mandatory disclosure is selective and cannot cover all platforms, then naïve investors can be attracted to the remaining platforms with perceived low risks. In contrast, P2P platforms in developed countries (e.g., Zopa, LendingClub, and Prosper) maintained their roles as information intermediaries and never bore liability for borrower default. The P2P lending market in the US and the UK were dominated by a few platforms that do not offer principal guarantee, and institutional investors are more. Therefore, compared with those in China, platforms in these countries face less competition, more sophisticated investors, and more stringent regulation, which led to different outcomes. Figure 3: Reasons for P2P Platform Collapse in China Table 2: Platform Collapse with More Than 1 Billion CNY Unpaid Loans: Platform Collapse time Unpaid loan (billion CNY) No. of lenders Fanya* 04/2015 33.8 135,000 Ezubao* 12/2015 38 895,000 Kuailu* 04/2016 10 – Qbao* 12/2017 30 – Shanlin* 04/2018 2.05 30,000 Tangxiaoseng* 06/2018 5.29 107,000 Lingqianguan* 06/2018 2.2 6,000 Caogen* 07/2018 9.7 130,000 Yindou* 07/2018 4.3 23,000 Jinyinmao* 07/2018 2.23 1,000 Jucaimao* 07/2018 1.14 9,000 Tourongjia* 07/2018 1.68 23,000 Yonglibao* 07/2018 1.64 33,000 Touzhijia* 07/2018 2.9 – Quark Finance* 08/2018 3.8 24,000 Leaderrcf* 09/2018 1.3 2,000 Yourongwang 01/2019 1.25 – Koudailic 03/2019 1.03 19,000 Tuandai* 03/2019 14.5 222,000 Xinhehui* 04/2019 2.25 15,000 Wanglibao* 05/2019 3.03 40,000 Credit Harmony* 05/2019 8.4 31,000 Jinxin99* 05/2019 9.7 50,000 Yinhuwang 05/2019 3.37 20,000 Niubangold* 07/2019 4.3 94,000 itouzi* 07/2019 12.9 – Houbank* 08/2019 1.18 16,000 Laocaibao* 09/2019 5 28,000 Mizlicai* 12/2019 1.32 12,000 Weidai* 07/2020 6 – Sources: Fintech-Book and various news outlets. SPRING 2022 NO.61 / THOUGHT LEADERSHIP BRIEF abscondence 19.37% Stop operation 13.75% Liquidity problem 18.53% Stop by owner 40.4% Fraud investigation 6.31% Transition 1.64%
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