Fintech, Regulatory Arbitrage, and the Rise of Shadow Banks

83 Pages Posted: 29 Mar 2017 Last revised: 30 Aug 2018

See all articles by Greg Buchak

Greg Buchak

University of Chicago

Gregor Matvos

University of Texas at Austin - Department of Finance

Tomasz Piskorski

Columbia Business School - Finance and Economics

Amit Seru

Stanford University

Multiple version iconThere are 2 versions of this paper

Date Written: May 1, 2017

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 Banks, Regulatory Arbitrage, Lending, Mortgages, FHA

JEL Classification: G2, L5

Suggested Citation

Buchak, Greg and Matvos, Gregor and Piskorski, Tomasz and Seru, Amit, Fintech, Regulatory Arbitrage, and the Rise of Shadow Banks (May 1, 2017). Columbia Business School Research Paper No. 17-39; Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2941561 or http://dx.doi.org/10.2139/ssrn.2941561

Greg Buchak

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Gregor Matvos

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States

Tomasz Piskorski

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Amit Seru (Contact Author)

Stanford University ( email )

Stanford, CA 94305
United States

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