Financing competitors : essays on shadow banks' funding
This dissertation provides an overview of the interaction between banks and shadow banks in the two markets: the warehouse lending market, in which banks supply funding to shadow banks, and in the mortgage origination market, in which banks and shadow banks compete with each other. It studies how their interaction in one market affects their interaction in the other market, the equilibrium feedback between the two markets, and the implications for policy pass-though.
I collect shadow bank call reports through FOIA requests and document that most of shadow banks’ warehouse funding is obtained from the banks that compete with them in the mortgage market. I provide evidence that banks trade off information advantage in warehouse lending against the loss in profits from increased mortgage market competition: (i) warehouse lending is clustered between competitors in local mortgage markets, especially in regions where public information of local housing value is less reliable; (ii) shadow banks cannot easily substitute to alternative funding sources if their relationship banks exogenously reduce warehouse lending; and (iii) a bank lends less to shadow banks in regions where it has greater market share in mortgage origination. To study the net effect on mortgage market competition in equilibrium, I calibrate a quantitative model that links warehouse lending and mortgage market competition. Warehouse lending market power is substantial. Banks charge 30% extra markups to the competing shadow banks relative to non-competitors. In the counterfactual, a faster GSE loan purchase program, which changes the warehouse lending market structure, would increase mortgage market competition, improving consumer welfare by $3.5 billion.