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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

Background and Context

Market Evolution

The U.S. mortgage market has undergone massive shifts since the 2008 financial crisis, with nonbank lenders surpassing traditional banks in mortgage lending.

Research Focus

The study examines how small banks persist in the mortgage market despite increased regulation, technological disruption, and competition from fintech firms.

Methodology

Analysis uses Home Mortgage Disclosure Act (HMDA) data from 2008-2015, examining lending patterns across different types of financial institutions at the county level.

Market Share Trends Show Small Banks' Resilience Amid Industry Shifts

  • Big4 banks experienced dramatic decline from 33% to 12% market share
  • Small banks maintained stable market share around 16-19%
  • Shadow banks grew significantly from 20% to 37% market share

Regulatory Burden Disproportionately Affected Big4 Banks

  • Big4 banks faced over $100 billion in mortgage-related fines
  • Penalties were five times larger for Big4 compared to all other banks combined
  • Small banks faced minimal regulatory penalties

Small Banks Show Strongest Response to Big4 Retreat

  • Small banks increased lending by 6.6% for every 10% decline in Big4 lending
  • Shadow banks and fintech firms showed much weaker response
  • Demonstrates small banks' key role in filling credit gaps

GSE Fee Changes Created Opportunities for Small Banks

  • G-fees increased from ~30 to ~60 basis points during 2011-2015
  • Fee discounts for large lenders were eliminated
  • Created level playing field for small banks in GSE lending

Balance Sheet Lending Advantage for Small Banks

  • Small banks increased balance sheet lending by 8.8% in areas of high Big4 retreat
  • Nonbank lenders showed limited balance sheet lending capability
  • Demonstrates small banks' unique advantage in portfolio lending

Contribution and Implications

  • Small banks remain vital players in mortgage lending despite fintech disruption and increased regulation
  • Regulatory burden heterogeneity and GSE fee structure changes created opportunities for small banks
  • Balance sheet lending capabilities provide small banks with competitive advantage over nonbank lenders

Data Sources

  • Market share trends visualization based on Figure 1 data
  • Regulatory burden visualization based on Figure 2 data
  • Lending response visualization based on Table 4 regression results
  • GSE fee changes visualization based on Figure 6 data
  • Balance sheet lending visualization based on Table 6 results