Fintech, Regulatory Arbitrage, and the Rise of Shadow Banks

We study the rise of shadow banks in the largest consumer loan market in the US. The market share of shadow banks in originating residential mortgages nearly doubled from 2007-2015. Shadow banks gained a larger market share among less creditworthy borrowers, with a significant share of loans being originated-to-distribute to GSEs. Difference in difference tests suggest that traditional banks contracted origination activity in markets in which they faced more capital and regulatory constraints; these gaps were partly filled by shadow banks. Shadow banks with predominately online mortgage application process, "fintech" lenders, accounted for roughly a quarter of shadow bank loan originations by 2015. Relative to non-fintech shadow banks, fintech lenders serve more creditworthy borrowers and are more active in the refinancing market. They appear to use different information in setting interest rates, consistent with a big data component of technology, and charge a convenience premium of 14-16 basis points. We use a simple model to decompose the relative contribution of technology and regulation to the rise of shadow banks. We interpret the variation in mortgage rates and market shares using the model and find that increasing regulatory burden faced by traditional banks and growth of financial technology can account, respectively, for about 70% and 30% of the recent shadow bank growth