In the wake of the 2007–10 financial crisis, there’s been sizeable growth of “shadow banking”— companies without banking charters entering lines of business traditionally associated with deposit-taking banks. Hedge funds that make direct loans to midsize businesses, online mortgage originators, peer-to-peer lending platforms, and payday lenders have all been on the rise.

What’s behind this? According to Chicago Booth’s Gregor Matvos, Booth PhD candidate Greg Buchak, Columbia’s Tomasz Piskorski, and Stanford’s Amit Seru, much of the growth is due to regulations that have pushed banks out of traditional lending businesses. The researchers also attribute some growth to online technology that has lowered the barrier to entry in markets where lenders once needed networks of physical branches to have any hope of building business.

The researchers focus on the US residential lending market, the largest consumer loan market in the country—and the market that drew the most attention from regulators after 2008. Between 2007 and 2015, shadow banks nearly tripled their market share, from 14 percent to 38 percent. They gained the most in the Federal Housing Administration (FHA) mortgage market, which serves lower-quality borrowers and is where shadow banks’ share rose from 20 percent to 75 percent.

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.

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