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Fintech, Regulatory Arbitrage, and the Rise of Shadow Banks

Listed author(s):
  • Greg Buchak
  • Gregor Matvos
  • Tomasz Piskorski
  • Amit Seru

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 tripled from 2007-2015. Shadow banks gained a larger market share among less creditworthy borrowers, with a tilt towards refinancing mortgages. Shadow banks were significantly more likely to enter markets where traditional banks faced more regulatory constraints. This suggests that traditional banks retreated from markets with a larger regulatory burden, and that shadow banks filled this gap. Fintech firms accounted for almost a third of shadow bank loan originations by 2015. To isolate 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. Analyzing fintech firms’ entry and pricing decisions, we find some evidence that fintech lenders possess technological advantages in determining corresponding interest rates. More 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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 23288.

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Date of creation: Mar 2017
Handle: RePEc:nbr:nberwo:23288
Note: CF LE ME
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  1. Rajan, Uday & Seru, Amit & Vig, Vikrant, 2015. "The failure of models that predict failure: Distance, incentives, and defaults," Journal of Financial Economics, Elsevier, vol. 115(2), pages 237-260.
  2. Thomas Philippon, 2015. "Has the US Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation," American Economic Review, American Economic Association, vol. 105(4), pages 1408-1438, April.
  3. Erik Hurst & Benjamin J. Keys & Amit Seru & Joseph Vavra, 2016. "Regional Redistribution through the US Mortgage Market," American Economic Review, American Economic Association, vol. 106(10), pages 2982-3028, October.
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  7. Tomasz Piskorski & Amit Seru & James Witkin, 2015. "Asset Quality Misrepresentation by Financial Intermediaries: Evidence from the RMBS Market," Journal of Finance, American Finance Association, vol. 70(6), pages 2635-2678, December.
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  11. Christopher Mayer & Edward Morrison & Tomasz Piskorski & Arpit Gupta, 2014. "Mortgage Modification and Strategic Behavior: Evidence from a Legal Settlement with Countrywide," American Economic Review, American Economic Association, vol. 104(9), pages 2830-2857, September.
  12. Piskorski, Tomasz & Seru, Amit & Vig, Vikrant, 2010. "Securitization and distressed loan renegotiation: Evidence from the subprime mortgage crisis," Journal of Financial Economics, Elsevier, vol. 97(3), pages 369-397, September.
  13. Berndt, Antje & Gupta, Anurag, 2009. "Moral hazard and adverse selection in the originate-to-distribute model of bank credit," Journal of Monetary Economics, Elsevier, vol. 56(5), pages 725-743, July.
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  16. Benjamin J. Keys & Tanmoy Mukherjee & Amit Seru & Vikrant Vig, 2010. "Did Securitization Lead to Lax Screening? Evidence from Subprime Loans," The Quarterly Journal of Economics, Oxford University Press, vol. 125(1), pages 307-362.
  17. Viral V. Acharya & Matthew Richardson & Stijn Van Nieuwerburgh & Lawrence J. White, 2011. "Guaranteed to Fail: Fannie Mae, Freddie Mac, and the Debacle of Mortgage Finance," Economics Books, Princeton University Press, edition 1, number 9400, June.
  18. Sumit Agarwal & Gene Amromin & Souphala Chomsisengphet & Tomasz Piskorski & Amit Seru & Vincent Yao, 2015. "Mortgage Refinancing, Consumer Spending, and Competition: Evidence from the Home Affordable Refinancing Program," NBER Working Papers 21512, National Bureau of Economic Research, Inc.
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