Traditional banks retreated from sectors of the mortgage market where the regulatory burden grew the most, the researchers note. Traditional banks have been particularly hindered by rules that increased monitoring of balance-sheet holdings and constrained what banks could hold in their own accounts. Their retreat helped shadow banking succeed in the riskier FHA market and in more-traditional, conforming mortgages.
The researchers also separated shadow banks into those that did and didn’t originate loans online. During the study period, lenders that originated loans online (fintech lenders) saw market share rise from 4 percent to 13 percent—but that remains less than half of the shadow-banking sector.
Fintech lenders have found a niche: they charge higher rates for the convenience of originating loans online, serving a constituency of time-sensitive, less-price-conscious, lower-risk borrowers. But fintech lenders rely almost entirely on support that government-sponsored entities Fannie Mae and Freddie Mac provide to the conforming mortgage market. Since the future of Fannie and Freddie is by no means assured, the study suggests that “how changes in political environment impacts the interaction between various lenders remains an area of future research.”
Up to 55 percent of the growth of shadow banking can be attributed to regulatory arbitrage, the researchers conclude, with alternative lenders operating where traditional banks either won’t or cannot because of postcrisis rules and capital requirements. Another 35 percent of growth, they say, can be attributed to disruptive technology.