Working Paper: NBER ID: w23288
Authors: Greg Buchak; Gregor Matvos; Tomasz Piskorski; Amit Seru
Abstract: Shadow bank market share in residential mortgage origination nearly doubled from 2007-2015, with particularly dramatic growth among online “fintech” lenders. We study how two forces, regulatory differences and technological advantages, contributed to this growth. Difference in difference tests exploiting geographical heterogeneity induced by four specific increases in regulatory burden–capital requirements, mortgage servicing rights, mortgage-related lawsuits, and the movement of supervision to Office of Comptroller and Currency following closure of the Office of Thrift Supervision--all reveal that traditional banks contracted in markets where they faced more regulatory constraints; shadow banks partially filled these gaps. Fintech lenders appear to offer a higher quality product and charge a premium of 14-16 basis points. Relative to other lenders, they seem to use different information to set interest rates. A quantitative model of mortgage lending suggests that regulation accounts for roughly 60% of shadow bank growth, while technology accounts for roughly 30%.
Keywords: Fintech; Shadow Banking; Regulatory Arbitrage; Mortgage Market
JEL Codes: G21; L51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased regulatory burdens on traditional banks (G28) | contraction in their lending activities (G21) |
| contraction in their lending activities (G21) | opportunities for shadow banks to expand their market share (G21) |
| increased regulatory burdens on traditional banks (G28) | growth of shadow banks (F65) |
| regulatory changes (G18) | shadow bank market share (G21) |
| traditional banks losing market share (G21) | shadow banks gaining market share (G21) |
| technological advancements (O33) | growth of shadow banks (F65) |