Proposing a New Research Framework for Loan Allocation Strategies in P2P Lending

One of the frontier Web 2.0 applications is online peer-to-peer (P2P) lending marketplace, where individual lenders and borrowers can virtually meet for loan transactions. From a lender’s perspective, she not only wants to lower investment risk but also to gain as much return as possible. However, P2P lenders possess the inherent problem of information asymmetry that they don’t really know if a borrower has capability to pay the loan or is truthfully willing to pay it in due time, leading them to a disadvantaged situation when making the decision of lending money to the borrower. This study intends to consider the loan allocation as an optimization research problem using the research framework based upon modern portfolio theory with the aim of helping lenders achieve the two goals of gaining high return and lowering risk at the same time. The expected results of this research are twofold: 1) compared to a logistic regression based credit scoring method, we expect to make more profits for lenders with risk level unchanged, and 2) compared to a linear regression based profit scoring method, we expect to lower risk without lowering return. Our proposed new model could offer insights into how individual lenders can optimize their loan allocation strategies when considering return and risk simultaneously

Do capital buffers mitigate volatility of bank lending? A simulation study

Critics claim that capital requirements can exacerbate credit cycles by restricting lending in an economic downturn. The introduction of Basel 2, in particular, has led to concerns that risksensitive capital charges are highly correlated with the business cycle. The Basel Committee is contemplating a revision of the Basel Accord by introducing counter-cyclical capital buffers. Others claim that capital buffers are already large enough to absorb fluctuations in credit risk. We address the question of the pro-cyclical effects of capital requirements in a general framework which takes into account banks' potential adjustment strategies. We develop a dynamic model of bank lending behavior and simulate different regulatory frameworks and macroeconomic scenarios. In particular, we address two related questions in our simulation study: How do business fluctuations affect capital requirements and bank lending? To what extent does the capital buffer absorb fluctuations in the level of mimimum required capital? --Minimum capital requirements,regulatory capital,capital buffer,cyclical lending,pro-cyclicality

Capital requirements, bank behavior and monetary policy: A theoretical analysis with an empirical application to India

The paper addresses the issue of monetary policy transmission through the banking sector in the presence of a bank capital regulation. A model of bank behavior is presented, which shows how a monetary policy shock affects both deposit and lending, in the short run (when equity capital is assumed to be fixed) as well as in the long run (when equity is endogenous). The analysis is extended to incorporate a salient feature of Basel II incorporating loans with differential risk weights. The findings are contrasted with those obtained under the 1988 Accord and the implications of the analysis are explored.Basel Accord; Bank equity; Credit risk; Monetary policy