Fintech, regulatory arbitrage, and the rise of shadow banks

By Greg Buchak, Gregor Matvos, Tomasz Piskorski, Amit Seru. Journal of Financial Economics, 2018

1,416 citations recorded by the source corpus.

Shadow bank market share in residential mortgage origination nearly doubled from 2007 to 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. Relative to other shadow banks, fintech lenders serve more creditworthy borrowers and are more active in the refinancing market. Fintech lenders charge a premium of 14–16 basis points and appear to provide convenience rather than cost savings to borrowers. They seem to use different information to set interest rates relative to other lenders. A quantitative model of mortgage lending suggests that regulation accounts for roughly 60% of shadow bank growth, while technology accounts for roughly 30%.

Subfields: Economics and Econometrics, Finance, Management Information Systems

View Paper: https://www.semanticscholar.org/paper/4f7815a4db1f8d4c0e9cdb4074a07090d6de247f

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Citations in the corpus

Fintech and banking: What do we know? (2019, positive): “For example, the Buchak et al. (2018a) paper views fintech as also including technology-assisted products provided by banks (e.g., online lending).”
The Rise of Shadow Banking: Evidence from Capital Regulation (2018, positive): “On the positive side, technological advances, liquidity transformation, and superior knowledge could motivate nonbank entry into this market (Buchak et al. 2018; Moreira and Savov 2017; Ordoñez 2018), which may lead to greater efficiency and lower borrowing costs for households (Fuster et al. 2019) ”
The Economic Forces Driving FinTech Adoption across Countries (2020, neutral): “Claessens et al. (2018) find higher FinTech credit volumes for these countries, as well. CCAF (2019) show that countries where regulation was judged in surveys to be more adequate (rather than excessive or inadequate) had higher alternative finance volumes.”
Fintech Credit Markets Around the World: Size, Drivers and Policy Issues (2018, background): “However, while Buchak et al (2017) also count Amerisave Mortgage, Cashcall Inc and Homeward Residential as fintech lenders, Fuster et al (2018) do not.”