Financing Competitors: Shadow Banks’ Funding and Mortgage Market Competition

Erica Xuewei and Tarun Ramadorai

The Review of Financial Studies, 2023, vol. 36, issue 10, 3861-3905

Abstract: Using novel shadow bank funding data, I find that shadow banks are funded by the very banks they compete with when originating mortgages. Evidence suggests that banks have market power in the upstream market for shadow banks’ funding, which in turn softens mortgage market competition through their strategic behaviors in both markets. I build and calibrate a quantitative model of vertical integration and competition to show that those consumers who would most benefit from shadow bank services are the ones to bear the costs. Secondary market innovation could increase downstream competition by reducing shadow banks’ reliance on their competitors.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

JEL-codes: G2 G5 L1 L5 (search for similar items in EconPapers)
Date: 2023
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