ESSAYS ON ALTERNATIVE CREDIT: ITS EVOLUTION AND IMPACT ON LENDING MARKETS AND FINANCIAL STABILITY

This thesis consists of two standalone chapters that empirically investigate distinct research questions. Despite their independence, both chapters are thematically connected through their exploration of the alternative credit market. The first chapter is titled "Disruptive Forces or Harmonious Partners? Unraveling the Role of Alternative Credit in Financial Stability and Its Relation with Conventional Credit." It focuses on the macroeconomic consequences of alternative credit. The chapter first highlights important dynamics in the rise of alternative credit. It specifically examines whether alternative credit substitutes or complements conventional bank credit and the effect of an external shock on such a relationship. Second, it investigates the role of these forms of alternative credit in financial stability. To address these research questions, I utilize a panel dataset of 1,024 observations across 145 countries from 2013 to 2020. To address these questions, I employ a Two-Stage Least Squares (2SLS) estimation method, along with the Half-Panel Jackknife Fixed Effects (HPJ-FE) estimator and the Grouped Fixed Effects (GFE) model, to ensure robustness against endogeneity, dynamic panel bias, and unobserved heterogeneity across countries. The study finds a positive relationship between alternative forms of credit (FinTech and BigTech credit) and traditional bank credit, indicating a complementary dynamic. This complementarity may stem from the alternative credit market's ability to serve credit demands beyond the reach of conventional banks—either by addressing the needs of un(der)served borrowers or fostering alliances between banks and technology firms to enhance credit extension. These developments can enhance efficiency, lower screening costs and time, and improve access through digital channels. The study also shows that external shocks such as the COVID-19 pandemic negatively impacted bank credit supply and may have weakened the complementarity between alternative credit and bank credit. I additionally show that alternative credit contributes modestly to financial stability, possibly due to diversification and technological innovations that enhance market efficiency, reduce transaction costs, and limit vulnerability to systemic institutional failures. However, external shocks such as the pandemic appear to increase the fragility of the banking system and diminish the gains observed during stable periods. In the second chapter titled "The GDPR Disruption: The Impact of Data Privacy Regulation on the Alternative Credit Market," I examine the impact of data regulation on credit extension by FinTech and BigTech firms. It is the first to empirically investigate how the General Data Protection Regulation (GDPR), a privacy regulation implemented in all European Union member states in 2018, shrinks firms' flexibility in data storage, sharing, and usage, and affects the alternative credit market. The study covers the period between 2013 and 2020 and employs a Difference-in-Differences (DiD) approach to estimate the causal effect of tighter data privacy regulations on the European alternative credit market. The net effect of GDPR on alternative credit is theoretically ambiguous. While it may reduce supply by increasing compliance costs and limiting access to granular data, it could also boost demand by enhancing consumer trust in financial technologies and regulatory institutions, as well as by reinforcing the market consolidation of established technology firms. The empirical result indicates that FinTech credit responds positively to the implementation of the GDPR, suggesting that data protection regulations can benefit FinTech lenders. However, no significant effect of GDPR on BigTech credit is observed. This likely reflects that potential reputational gains from compliance are delayed or diluted by persistent consumer concerns over data misuse, high compliance costs, and intense regulatory scrutiny.