Fintech and Shadow Banking

Tomasz Piskorski

Columbia GSB and NBER
..............................................................................................................................................................

Last Decade: Dramatic Change in Lending Landscape

• Rapid rise of shadow banks (SBs) in the lending market

• Occurred during the period of increasing bank regulatory burden

20%

30%

40%

50%

60%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Shadow bank share in the $10 trillion US mortgage market

Source: Buchak, Matvos, Piskorski, and Seru (2018a)
..............................................................................................................................................................

Last Decade: Dramatic Change in Lending Landscape

• Rapid rise of shadow banks (SBs) in the lending market

• Occurred during the period of increasing bank regulatory burden

• Fintech lenders important part of this trend

• Shadow banks early adopters of financial technology

20%

30%

40%

50%

60%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Shadow bank share in the $10 trillion US mortgage market

Source: Buchak, Matvos, Piskorski, and Seru (2018a)

1/3rd Fintech
..............................................................................................................................................................

Rise of Shadow Banks: Key Questions

• How much of the growth driven by regulations vs technology

❍ Regulation: capital costs, scrutiny/supervision burden, legal costs

❍ Technology: lower costs, higher quality products, better models

• Impact on consumers

• E.g., access/distribution/pricing of credit/financial services 

• Implications for financial stability and regulation

• Need to rethink current regulatory framework?
..............................................................................................................................................................

Rise of Shadow Banks: Regulatory Burden?

• Extensive regulation of banks after crisis

• Dodd Frank

• Basel III

• Changes in regulators, enforcement..

• Regulation dampens bank lending

• Traditional banks face rising capital costs

• Traditional banks face greater capital constraints

• Traditional banks face greater regulatory scrutiny

• Shadow banks fill regulatory gaps?
..............................................................................................................................................................

Shadow Bank Expansion in the Residential Mortgage Market

2008

Source: Buchak, Matvos, Piskorski, and Seru (2018a)
..............................................................................................................................................................

Shadow Bank Expansion in the Residential Mortgage Market

2015

Source: Buchak, Matvos, Piskorski, and Seru (2018a)
..............................................................................................................................................................

Rise of Shadow Banks: Regulatory Burden?

• Source of Variation (BMPS, 2018a)

• Banks are exposed to national-level regulatory shocks

• Counties exposed through 2008 bank lending market share

• County-level variation in exposure to differentially shocked banks

• Regulatory Changes

1. Higher Capital Requirements

Bank Capitalization: Banks rebuilding capital  Lend less

2. Enforcement / Legal Risk

Lawsuits: Banks exposed to more mortgage-related lawsuits  Lend less

3. Tighter regulatory supervision: 

OTS Closure: Banks supervised by OTS  Lend Less

• Outcome

• Changes in shadow bank market share from 2008

Source: Buchak, Matvos, Piskorski, and Seru (2018a)
..............................................................................................................................................................

Shadow Bank Expansion and Bank Regulatory Burdn

• Assess shadow expansion in response to bank regulatory burden

• Shocks to Regulatory Burden (BMPS 2017)

• Banks retreated and shadow banks expanded where regulatory burden ↑

ROLE OF REGULATION IN SHADOW BANK EXPANSION

ΔΔΔΔΔΔΔΔΔΔΔΔΔΔ BB BBBB LLLL LL LL SS cc = ββ0 + ββ1ΔΔRR RRRR RR RR BB BBcc + XXcc

′

Γ + εεcc

Source: Buchak, Matvos, Piskorski, and Seru (2018a)
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Rise of Shadow Banks: Technology?

• Fintech lenders account for significant part of SB expansion

• 1/3rd in the mortgage market

• Fintech lenders (BMPS, 2018a)

• Serve more creditworthy borrowers than shadow banks

• Focus on refinancing

• Originate and sell loan faster than traditional banks

• Seem to use different models/data in loan origination process

• Provide convenience rather than direct cost savings 

Source: Buchak, Matvos, Piskorski, and Seru (2018a)
..............................................................................................................................................................

Fintech Premium: Fintech vs Bank Mortgage Rates

3.50

3.75

4.00

4.25

4.50

4.75

5.00

5.25

Source: Buchak, Matvos, Piskorski, and Seru (2018a)

Fintech Lenders

Traditional Banks
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Fintech Premium: Fintech vs Bank Mortgage Rates

3.50

3.75

4.00

4.25

4.50

4.75

5.00

5.25

Source: Buchak, Matvos, Piskorski, and Seru (2018a)

Fintech Lenders

Traditional Banks

• Fintech can offer borrowers convenience rather than costs savings
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Rise of Shadow Banks: Regulation vs Technology

• What we know so far:

• Shadow banks expand in areas with banks subject to more regulatory oversight

• Fintech lenders command rate premium and appear to process/sell loans faster

• Quantitative model to assess role of technology and regulation

• Combine regulatory and technology effects

• Decomposition: how much in technology and how much is regulation

• Informed by the data (market shares, prices)

• Key Findings

• Estimate that 60-70% of shadow bank growth due to regulation

• Rest due to financial technology (about 30%)
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Rise of Shadow Banks: Regulation vs Technology

-5%

0%

5%

10%

15%

20%

25%

No Changes Regulatory

Burden

Fintech Quality

Increase

Actual

Fintech Non-Fintech

Source: Buchak, Matvos, Piskorski, and Seru (2018a)

• 60-70% of shadow bank growth due to increase in bank regulatory burden 

• Rest due to financial technology (about 30%)
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Rise of Shadow Banks: Implications

• Implications for Financial Stability

• Fintech/SBs have no deposit funding base, limited balance sheet capacity 

• Dependent on ability to sell loans/warehouse lines/GSEs/crowdfunding 

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Not Sold/Affiliate GSE Private Securitization Bank Insurer Other

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Not Sold/Affiliate GSE Private Securitization Bank Insurer Other

Traditional Bank Mortgage Disposition Shadow Bank Mortgage Disposition

Retained

Sold to GSEs Sold to GSEs

Source: Buchak, Matvos, Piskorski, and Seru (2018a)
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Rise of Shadow Banks: Implications

• Implications for Financial Stability

• Fintech/SBs have no deposit funding base, limited balance sheet capacity 

• Dependent on ability to sell loans/warehouse lines/GSEs/crowdfunding 

• SBs can quickly shutdown in the face of funding problems like in 2007

o Mortgage market shadow bank share: 2007 ≈ 25% vs Now > 50%

• New lending models have not been tested during downturn

• In case of the shutdown of fintech/SB lenders who will pick up the slack?

o Traditional banks (TB) may be unable due to limited experience/market presence

Retained

Sold to GSEs
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Rise of Shadow Banks: Implications

Retained

Sold to GSEs Sold to GSEs

-$120

-$100

-$80

-$60

-$40

-$20

$0

$20

$40

3% 4.5% 6% 7.5% 9%

TB response

Lending Changes ($B) and Capital Ratios

Source: Buchak, Matvos, Piskorski, and Seru 2018b

• Implications for Regulatory Framework (BMPS, 2018b)

• Need to recognize the role of shadow banks and IO of the market

• SBs response can significantly affect transmission of various polices

o Quantity, pricing, distribution of credit, bank stability

Baseline
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Rise of Shadow Banks: Implications

Retained

Sold to GSEs Sold to GSEs

-$120

-$100

-$80

-$60

-$40

-$20

$0

$20

$40

3% 4.5% 6% 7.5% 9%

-$120

-$100

-$80

-$60

-$40

-$20

$0

$20

$40

3% 4.5% 6% 7.5% 9%

TB response

TB+SB response

Shadow banks

“dampen” the response

Lending Changes ($B) and Capital Ratios

Source: Buchak, Matvos, Piskorski, and Seru 2018b

• Implications for Regulatory Framework (BMPS, 2018b)

• Need to recognize the role of shadow banks and IO of the market

• SBs response can significantly affect transmission of various polices

o Quantity, pricing, distribution of credit, bank stability

Baseline
..............................................................................................................................................................

Rise of Shadow Banks: Implications

Retained

Sold to GSEs Sold to GSEs

-$120

-$100

-$80

-$60

-$40

-$20

$0

$20

$40

3% 4.5% 6% 7.5% 9%

-$120

-$100

-$80

-$60

-$40

-$20

$0

$20

$40

3% 4.5% 6% 7.5% 9% -$400

-$300

-$200

-$100

$0

$100

$200

$300

$400

-25% Baseline 25% No Limit

TB response

TB+SB response

Shadow banks

“dampen” the response TB response

Lending Changes ($B) and Capital Ratios Lending Changes ($B) and Conforming Limit

Source: Buchak, Matvos, Piskorski, and Seru 2018b

• Implications for Regulatory Framework (BMPS, 2018b)

• Need to recognize the role of shadow banks and IO of the market

• SBs response can significantly affect transmission of various polices

o Quantity, pricing, distribution of credit, bank stability

Baseline
..............................................................................................................................................................

Rise of Shadow Banks: Implications

Retained

Sold to GSEs Sold to GSEs

-$120

-$100

-$80

-$60

-$40

-$20

$0

$20

$40

3% 4.5% 6% 7.5% 9%

-$120

-$100

-$80

-$60

-$40

-$20

$0

$20

$40

3% 4.5% 6% 7.5% 9% -$400

-$300

-$200

-$100

$0

$100

$200

$300

$400

-25% Baseline 25% No Limit

-$400

-$300

-$200

-$100

$0

$100

$200

$300

$400

-25% Baseline 25% No Limit

TB response

TB+SB response

TB response

TB+SB response

Shadow banks

“dampen” the response

Shadow banks

“amplify” the response

Lending Changes ($B) and Capital Ratios Lending Changes ($B) and Conforming Limit

Source: Buchak, Matvos, Piskorski, and Seru 2018b

• Implications for Regulatory Framework (BMPS, 2018b)

• Need to recognize the role of shadow banks and IO of the market

• SBs response can significantly affect transmission of various polices

o Quantity, pricing, distribution of credit, bank stability

Baseline
..............................................................................................................................................................

Rise of Shadow Banks: Implications

• Taxpayer Exposure

• No direct FDIC exposure...but GSE exposure in the mortgage market

o Increased taxpayer risk due to limited regulation and GSE guarantees?

o Can make scaling down the role of GSEs even harder

• Consumer Welfare 

• SBs dominate market for the least creditworthy (+80% FHA market share)

o Much less regulatory oversight than traditional banks

• Use of big data/credit scoring algorithms create regulatory challenges

• Traditional Bank Response

• Shadow banks were early adopters of new technologies

o Less concern about regulatory implications, no legacy investments/systems

• Traditional banks are catching up 

o Evolving market structure can create further regulatory challenges 

Sold to GSEs
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References

• Buchak, G., G. Matvos, T. Piskorski, A, Seru, 2018a, “Fintech, 

Regulatory Arbitrage, and the Rise of Shadow Banks”, Journal of 

Financial Economics 130, 453-483.

Available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2941561

• Buchak, G., G. Matvos, T. Piskorski, A, Seru, 2018b, “The Limits of 

Shadow Banks”, National Bureau of Economic Research Working 

Paper 25149.

Available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3260434