Financing Competitors: Shadow Banks' Funding and Mortgage Market Competition

91 Pages Posted: 14 Apr 2020 Last revised: 9 Aug 2022

Date Written: December 13, 2019

Abstract

Using novel shadow bank funding data, I find that shadow banks are funded by the very banks with which they compete in originating mortgages. Empirical evidence suggests that banks have market power in the upstream market for shadow banks’ funding, which in turn softens mortgage market competition through their strategic behaviors in both markets. I build and calibrate a quantitative model of vertical integration and competition to show that the costs are largely borne by consumers who would benefit most from shadow bank services. Secondary market innovation could increase downstream competition by reducing shadow banks’ reliance on their competitors.

Keywords: Intermediaries, competition, shadow bank, warehouse lines, mortgages

JEL Classification: G2, G5, L1, L5

Suggested Citation

Jiang, Erica Xuewei, Financing Competitors: Shadow Banks' Funding and Mortgage Market Competition (December 13, 2019). USC Marshall School of Business Research Paper Sponsored by iORB, No. Forthcoming, Available at SSRN: https://ssrn.com/abstract=3556917 or http://dx.doi.org/10.2139/ssrn.3556917

Erica Xuewei Jiang (Contact Author)

University of Southern California ( email )

701 Exposition Blvd, HOH 431
Los Angeles, CA California 90089-1424
United States

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