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Regulating Banks in the Era of Shadow Banks
Amit SeruStanford GSB, Hoover and NBER
Andrew Crockett Memorial Lecture June 30, 2019
20%
30%
40%
50%
60%
70%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
RISE OF SHADOW BANKS
Dramatic Change in Lending LandscapeShadow bank share in the US personal loan market
20%
30%
40%
50%
60%
70%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
RISE OF SHADOW BANKS
Dramatic Change in Lending LandscapeShadow bank share in the US residential mortgage market
Dramatic Change in Lending over last DecadeRISE OF SHADOW BANKS
RISE OF SHADOW BANKS
Dramatic Change in Lending LandscapeType Mar ket size % in side
banking system % in banking system at risk
Select disruptors
Personal Loans $843bn 81 31 Lending Club, Prosper
Small Business Loans $186bn 95 100 On Deck, Kabbage
Leveraged Loans $832bn 7 34 Alternative AM, BDCs
Student Loans $1,222bn 5 100 SoFi, Earnest
Mortgage Loans $1,169bn 58 100 Quicken, PFSI, Freedom
CRE Loans $2,354bn 56 9 Commercial REITs
RISE OF SHADOW BANKS
Dramatic Change in Lending Landscape
RISE OF SHADOW BANKS (EU)
Dramatic Change in Lending Landscape
RISE OF SHADOW BANKS (CHINA)
Dramatic Change in Lending Landscape
REGULATION?
County Level Shadow Bank Share: 2008
County Level Shadow Bank Share: 2015
Change in Shadow Bank Share and RegulationCHANGE IN SHADOW BANK SHARE AND REGULATORY PRESSURE
TECHNOLOGY?
Technology?
Quicken Loans
Technology? Faster ProcessingTIME TO SELL
0
10
20
30
40
50
60
2010 2011 2012 2013 2014 2015 2016 2017
Traditional Lender Quicken Loans
Technology? Leveraging Credit InformationREFINANCING PERCENT
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 20170
10
20
30
40
50
60
2010 2011 2012 2013 2014 2015 2016 2017
Traditional Lender Quicken Loans
Technology? Other Data% DECLARED WHITE
40
45
50
55
60
65
70
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 20170
10
20
30
40
50
60
2010 2011 2012 2013 2014 2015 2016 2017
Traditional Lender Quicken Loans
Technology? Quality
Technology? Willingness to Pay
3.50
3.75
4.00
4.25
4.50
4.75
5.00
5.25
2010-Q1
2010-Q2
2010-Q3
2010-Q4
2011-Q1
2011-Q2
2011-Q3
2011-Q4
2012-Q1
2012-Q2
2012-Q3
2012-Q4
2013-Q1
2013-Q2
2013-Q3
2013-Q4
2014-Q1
2014-Q2
2014-Q3
2014-Q4
2015-Q1
2015-Q2
2015-Q3
2015-Q4
INTEREST RATES ON LOANS
INTEGRATED INTERMEDIATION
BUSINESS MODEL
Where are the loans?TRADITIONAL BANKS
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
Retained
Sold to GSEs
Bank Capitalization and Balance Sheet RetentionACROSS LENDERS WITHIN LENDERS
Where are the loans?SHADOW BANKS
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
Sold to GSEs
INDUSTRIAL ORGANIZATION
TRADITIONAL BANK MARKET SHARE
Penetration of Shadow Banks Not Uniform
Market Segmentation and FinancingTRADITIONAL BANK MARKET SHARE BALANCE SHEET FINANCING
0%
20%
40%
60%
80%
100%
0.8 0.85 0.9 0.95 1 1.05 1.1 1.15 1.20%
20%
40%
60%
80%
100%
0.8 0.85 0.9 0.95 1 1.05 1.1 1.15 1.2
Easy to securitize Hard to securitize Easy to securitize Hard to securitize
EQUILLIBRIUM
Not in the data
Funding Costs?Banks Lose Market Share
Regulation?Banks Lose Market Share
Not in the data
Funding Costs?FinTech Gain Market Share
Quality?FinTech Gain Market Share
COUNTERFACTUALS
0
400
800
1200
1600
2000
4.50% 6% (Baseline) 7.50%
Shadow Bank GSE Conforming Bank GSE Conforming
Bank Balance Sheet Conforming Bank Balance Sheet Jumbo
CAPITAL REQUIREMENTS 6% à 7.5%
Lender Loan TypeFinancing
Source ChangeTotal - - -$13b
Bank Jumbo Portfolio -$38b
Bank Conforming Portfolio -$204b
Bank Conforming GSE +$215b
Shadow Bank Conforming GSE +$14b
LENDING VOLUMES ($B)
Bank
GSE
BalanceSheet
Jumbo
GSE
C
on
fo
rm
in
g
Counterfactuals: Capital Ratios
LENDING VOLUME CHANGES ($B)
Counterfactuals: Capital Ratios
-$250
-$200
-$150
-$100
-$50
$0
$50
3% 4.5% 6% 7.5% 9% 12%
Without shadow banks
Counterfactuals: Capital Ratios
-$250
-$200
-$150
-$100
-$50
$0
$50
3% 4.5% 6% 7.5% 9% 12%
With shadow banks
Without shadow banks
Shadow banks“dampen” the response
LENDING VOLUME CHANGES ($B)
0
400
800
1200
1600
2000
-10bps +0bps (Baseline) +10bpsShadow Bank GSE Conforming Bank GSE ConformingBank Balance Sheet Conforming Bank Balance Sheet Jumbo
Counterfactuals: QEGSE FINANCING COST -10BPS LENDING VOLUMES ($B)
GSE
BalanceSheet
JumboLender Loan Type
Financing Source Change
Total - - +$61b
Bank Jumbo Balance Sheet -$4b
Bank Conforming Balance Sheet -$357b
Bank Conforming GSE +$389b
Shadow Bank Conforming GSE +$33b
Counterfactuals: QE
-$400
-$200
$0
$200
$400
$600
$800
-100bps -25bps -10bps Baseline +10bps +25bps +100bps
Without shadow banks
LENDING VOLUME CHANGES ($B)
Counterfactuals: QE
-$400
-$200
$0
$200
$400
$600
$800
-100bps -25bps -10bps Baseline +10bps +25bps +100bps
Without shadow banks
With shadow banks
Shadow banks“amplify” the response
LENDING VOLUME CHANGES ($B)
IMPLICATIONS
InterlinkagesTYPICAL SHADOW BANK BALANCE SHEET
A L
Cash =10 ST Debt from Banks = 75Equity = 25Mortgages for Sale =70
MSR =15IT =5