Description:

Speaker: JD Salas

Title: Screening, Selection and Asymmetric Regulation: Banks and Shadow Banks in the Mortgage Market

Abstract:
This paper studies the interaction between borrower search and the sorting of borrowers into lenders according to their risk profile. The demand side generates endogenous adverse selection as a result of the search process: riskier borrowers are willing to accept higher rates because they are more likely to get rejected. The supply side endogenizes the screening incentives of lenders as a function of their lending models, with traditional banks and shadow banks representing both extremes of the spectrum. The probability of holding loans from low creditworthiness borrowers and the regulatory oversight makes banks behave more risk-averse at origination. I document substantial heterogeneity in approval rates between banks and shadow banks and within banks depending on how many loans the bank could hold on their balance sheet. I’ll focus on supply side estimates.