Risk Assessment of FinTech Lending Platform Business Models

University essay from Handelshögskolan i Stockholm/Institutionen för finansiell ekonomi

Abstract: This thesis analyzes risks related to FinTech lending platforms and consists of two parts. Part I examines the risks arising from innovations in the FinTech lending platform sphere and their impact on the regulatory framework. A qualitative analysis maps the innovation's effect on risk factors and finds altogether increased risk levels for the financial system, financial institutions and users. Furthermore, loan volume is identified as a profitability driver of FinTech lending platforms and a quantitative study is conducted on macroeconomic and firm-specific factors that impact the loan volume. The analysis finds that FinTech lending platforms suspend the problem of procyclical credit provision inherent to conventional lending models and that firm-specific scandals have a negative impact on loan volume. The discussion of current regulatory frameworks finds that there is an international divergence and that current policies are inadequate in addressing the identified risk factors. Therefore, this thesis proposes the introduction of stress testing to FinTech lending platforms in order to better assess risks, adapt regulation and prepare companies to sustain crises. Part II reruns the quantitative analysis for a second company and the results reinforce the countercyclical pattern found in analysis I. Moreover, the loss of investor confidence from a scandal is identified as a firm-specific risk and does not affect other companies in the system.

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