Small lenders may pose unexpected systemic risk as recession fears grow

Chris Dannen

By Chris Dannen


The chances of recession appear to be growing, according to economists polled by Reuters last month: 25 percent predicted a US recession over the next 12 months. Dovish comments from the Fed have increased the fears that there will be no rate hikes to stall inflation, which increased 55% between 1996 and 2016, according to AEI.  

Fears were quelled somewhat last Friday, when JPMorgan Chase posted better than expected quartery earnings, which it attributed to "solid U.S. economic growth." But it may be smaller lenders who post a threat in aggregate, many of whom claim to have their own proprietary risk metrics.

Worried a recession is coming, U.S. online lenders reduce risk

"A recession could bring escalating credit losses, liquidity crunch and higher funding costs, testing business models in a relatively nascent industry. Peer-to-peer and other digital lenders sprouted up largely after the Great Recession of 2008. Unlike banks, which tend to have lower-cost and more stable deposits, online lenders rely on market funding that can be harder to come by in times of stress. Their underwriting methods also often include analysis of non-traditional data, such as education level of borrowers. While platforms see that as a strength, it has yet to be tested in times of crisis."

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