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Mortgage Securitization and Shadow Bank Lending
[The liquidity coverage ratio and liquidity risk monitoring tools]

Author

Listed:
  • Pedro Gete
  • Michael Reher

Abstract

We show how securitization affects the size of the nonbank lending sector through a novel price-based channel. We identify the channel using a regulatory spillover shock to the cross-section of mortgage-backed security prices: the U.S. liquidity coverage ratio. The shock increases secondary market prices for FHA-insured loans by granting them favorable regulatory status once securitized. Higher prices lower nonbanks’ funding costs, prompting them to loosen lending standards and originate more FHA-insured loans. This channel accounts for 22% of nonbanks’ growth in overall mortgage market share over 2013–2015. While the shock creates risks for financial stability, homeownership also increases.

Suggested Citation

  • Pedro Gete & Michael Reher, 2021. "Mortgage Securitization and Shadow Bank Lending [The liquidity coverage ratio and liquidity risk monitoring tools]," The Review of Financial Studies, Society for Financial Studies, vol. 34(5), pages 2236-2274.
    • Handle: RePEc:oup:rfinst:v:34:y:2021:i:5:p:2236-2274.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhaa088
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    Citations

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    Cited by:

    1. Wei, Xin & Liu, Xi & Zhang, Xueyong, 2022. "Shadow banking and the cross-section of stock returns," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 81(C).
    2. Eliana Balla & Raymond Brastow & Daniel Edgel & Morgan Rose, 2024. "The Effect of Regulatory Oversight on Nonbank Mortgage Subsidiaries," The Journal of Real Estate Finance and Economics, Springer, vol. 68(3), pages 523-575, April.
    3. Isha Agarwal & Malin Hu & Raluca Roman & Keling Zheng, 2023. "Lending by Servicing: Monetary Policy Transmission Through Shadow Banks," Working Papers 23-14, Federal Reserve Bank of Philadelphia.
    4. Gong, Yifan & Yao, Yuxi, 2022. "Demographic changes and the housing market," Regional Science and Urban Economics, Elsevier, vol. 95(C).
    5. Sundaresan, Suresh & Xiao, Kairong, 2024. "Liquidity regulation and banks: Theory and evidence," Journal of Financial Economics, Elsevier, vol. 151(C).
    6. Reher, Michael, 2021. "Finance and the supply of housing quality," Journal of Financial Economics, Elsevier, vol. 142(1), pages 357-376.

    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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