Abstract

We study the rise of fintech and non-fintech shadow banks in the residential lending market. The market share of shadow banks in the mortgage market has nearly doubled from 2007-2015. Shadow banks gained a larger market share in the refinancing market and among less creditworthy borrowers accounting for three-quarters of loan originations to most indebted borrowers. Shadow banks were significantly more likely to expand their market share where traditional banks faced more capital and regulatory constraints. This suggests that traditional banks facing increased capital and regulatory burden retreated from residential mortgage lending, and that shadow banks stepped into this gap. Fintech firms accounted for almost a third of shadow bank loan originations by 2015. To investigate the role of technology in the decline of traditional banking, we focus on technology differences between shadow banks, holding the regulatory differences between different lenders fixed. Fintech lenders serve more creditworthy borrowers and are more active in the refinancing market. Analyzing fintech firms' pricing decisions, we find some evidence that fintech lenders use different methods in determining corresponding interest rates. Importantly, the online origination technology appears to allow fintech lenders to originate loans with greater convenience for their borrowers. Among the borrowers most likely to value convenience, fintech lenders command an interest rate premium for their services. We use a simple model to decompose the relative contribution of technology and regulation to the rise of shadow banks. This simple quantitative assessment indicates that increasing regulatory burden faced by traditional banks and financial technology can account, respectively, for about 55% and 35% of the recent shadow bank growth.

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Citation

Buchak, Greg, Gregor Matvos, Tomasz Piskorski, and Amit Seru. "Fintech, Regulatory Arbitrage, and the Rise of Shadow Banks." Columbia Business School, March 1, 2017.

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