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Small Bank Lending in the Era of Fintech and Shadow Banks: A Sideshow?

Journal: Review of Financial Studies

Date: 20221101

Author: Begley, Taylor A.; Srinivasan, Kandarp

Abstract:
Amid the emerging dominance of nonbanks, small banks use key financing advantages to persist in the mortgage market. We provide evidence of the heterogeneous impact of two shocks to the supply of mortgage credit: postcrisis regulatory burden and GSE financing cost changes. Small banks exploit regulation disproportionately affecting the largest four banks (Big4) and their ability to lend on balance sheet to strongly substitute for the retreating Big4. The erasure of guarantee fee (g-fee) discounts for large lenders facilitates small bank growth in GSE lending. Small banks also grow balance sheet loans in areas more exposed to g-fee hikes.

Link: Google Scholar

Key Findings

Small Banks Maintain Market Share

Despite increased competition from nonbanks and fintech lenders, small banks maintained a stable market share of ~16-19% from 2008-2015, while larger banks saw significant declines.

Regulatory Burden Impact

Post-crisis regulatory burden fell disproportionately on Big4 banks through higher capital requirements and $100B+ in fines, allowing small banks to gain market share in affected areas.

GSE Lending Growth

Changes in GSE guarantee fees benefited small banks through elimination of volume discounts and overall fee increases, leading to growth in both GSE and balance sheet lending.

Market Share Evolution 2008-2015

  • Big4 banks saw dramatic decline from 33% to 12% market share
  • Small banks maintained stable ~16-19% share
  • Shadow banks grew significantly from 21% to 47% share

Regulatory Impact Across Bank Types

  • Big4 banks faced highest capital ratio increases
  • Mortgage servicing rights impact most severe for Big4
  • Fines disproportionately affected largest institutions

GSE Fee Structure Impact

  • G-fees converged between large and small lenders by 2015
  • Overall fee levels increased from ~30 to ~60 basis points
  • Small banks showed 5% GSE lending growth vs. -20% for Big4

Contribution and Implications

  • First study to document small banks' resilience amid fintech disruption and increased regulation
  • Demonstrates how regulatory burden heterogeneity creates opportunities for smaller institutions
  • Shows importance of GSE policy changes in reshaping competitive dynamics

Data Sources

  • Market Share Evolution chart based on Figure 1 showing aggregate lending shares over time
  • Regulatory Impact visualization derived from Figure 2 showing differential impacts across bank sizes
  • GSE Fee Structure chart constructed from Figure 6 showing guarantee fee changes from 2008-2015