Financing Competitors : Shadow Banks' Funding and Mortgage Market Competition

Banks and shadow banks compete in originating mortgages, while shadow banks' balance sheets are financed by bank loans. Shadow bank filing data obtained through FOIA requests show that while shadow banks are more likely to obtain funding from banks with in-house mortgage origination in their regions, less so if the banks' local origination market shares are high, and the shadow banks receive more expensive funding in this case. Using a structural model of their simultaneous interactions in both origination and the funding markets, I show that the synergy between these two types of lending lowers banks' cost of financing their mortgage market competitors by 35%, leading to an optimal "financing-competitor" market structure when funding relationships are more substitutable. As funding relationships become more differentiated, the limits to mortgage market competition from banks' strategic lending behavior become stronger. Consumer surplus declines by 5% if shadow banks fully rely on their existing banking relationships for funding