Abstract Alternative financial institutions have grown as a source of credit for low-income borrowers deemed credit risks by banks. This article examines how predatory lending flourishes despite regulatory tightening. I theorize three varieties of regulatory capitalism in North America, the Asia-Pacific, and Europe, each shaped by its developmental history and each of which influences different forms of collateralization, regulatory evasion, and risk laundering that predatory lenders pursue for profit. In North America, a region characterized by liberal market economies and a fragmented regulatory environment, firms adopt tactics such as the use of scalable resale markets to collateralize borrowers’ goods through pawnshop chains, regulatory evasion through legal arbitrage, and risk laundering in the form of secondary market sales. In the Asia-Pacific, where microloans are historically entrenched and formal institutions are weak, firms adopt tactics such as collateralizing personal gold and personal jewelry to defy traceability, regulatory evasion through product substitution, and risk laundering by shifting operations across the region. In Europe, which is characterized by coordinated market economies with strong consumer protections and high institutional trust, firms largely pivot away from collateralization toward bundling their collateral with insurance as a means of evading regulatory frictions, and pursue bond-based risk laundering. These processes enable lenders not only to circumvent regulatory tightening, but create new instruments to extract profit from borrowers.
Anson Au (Fri,) studied this question.