Small Bank Lending in the Era of Fintech and Shadow Banking: A Sideshow?

Abstract

Amid the emerging dominance of nonbanks, small banks use key financing advantages to persist in the mortgage market. We provide evidence on the heterogeneous impact of two shocks to the supply of mortgage credit: post-crisis regulatory burden and GSE financing cost changes. Small banks exploit disproportionate regulation on the largest four banks (Big4) and their ability to lend on balance sheet to strongly substitute for the retreating Big4. The erasure of guarantee fee (g-fee) discounts for large lenders facilitates small bank growth in GSE lending. Small banks also grow balance sheet loans in areas more exposed to g-fee hikes.

Keywords: small banks, shadow banks, fintech, mortgage market, mortgage lending

JEL Classification: G2, R31, L1