Fintech, Regulatory Arbitrage, and the Rise of Shadow Banks This paper examines the factors driving the rapid growth of shadow banks in the U.S. mortgage market, particularly the role of regulatory differences and technological advancements. Shadow banks, which are non-depository institutions outside traditional banking regulation, have significantly increased their market share in mortgage origination, nearly doubling from 30% in 2007 to 50% in 2015. This growth has been especially pronounced in the FHA market, where shadow banks hold 75% of the market share in 2015. A significant portion of this growth comes from fintech lenders, which primarily originate mortgages online and accounted for a quarter of shadow bank origination in 2015. The paper tests two main hypotheses: one that regulatory burdens on traditional banks have driven their decline, and another that technological advancements have enabled fintech lenders to gain market share. The findings suggest that both factors have contributed to the growth of shadow banks. Regulatory changes, such as increased capital requirements and the movement of supervision to the Office of the Comptroller and Currency, have placed more pressure on traditional banks, leading them to contract in markets where they faced more regulatory constraints. Shadow banks have filled these gaps by offering more flexible and cost-effective services. Technological advancements have also played a crucial role, with fintech lenders able to offer more efficient and convenient services. Fintech lenders charge higher interest rates than traditional banks and non-fintech shadow banks, suggesting that consumers are willing to pay a premium for the convenience and efficiency of fintech services. Additionally, fintech lenders use different information to set interest rates, leveraging big data and alternative sources of information. The paper also finds that fintech lenders are more likely to serve borrowers with lower credit scores and in areas with higher unemployment. This suggests that fintech lenders are targeting segments of the market that traditional banks have traditionally avoided. The results indicate that regulatory changes and technological advancements have both contributed to the growth of shadow banks, with regulation accounting for about 60% of the growth and technology accounting for about 30%. The remaining growth is attributed to other factors. The paper concludes that both regulatory and technological factors have played a significant role in the decline of traditional banks' market share in the mortgage market.Fintech, Regulatory Arbitrage, and the Rise of Shadow Banks This paper examines the factors driving the rapid growth of shadow banks in the U.S. mortgage market, particularly the role of regulatory differences and technological advancements. Shadow banks, which are non-depository institutions outside traditional banking regulation, have significantly increased their market share in mortgage origination, nearly doubling from 30% in 2007 to 50% in 2015. This growth has been especially pronounced in the FHA market, where shadow banks hold 75% of the market share in 2015. A significant portion of this growth comes from fintech lenders, which primarily originate mortgages online and accounted for a quarter of shadow bank origination in 2015. The paper tests two main hypotheses: one that regulatory burdens on traditional banks have driven their decline, and another that technological advancements have enabled fintech lenders to gain market share. The findings suggest that both factors have contributed to the growth of shadow banks. Regulatory changes, such as increased capital requirements and the movement of supervision to the Office of the Comptroller and Currency, have placed more pressure on traditional banks, leading them to contract in markets where they faced more regulatory constraints. Shadow banks have filled these gaps by offering more flexible and cost-effective services. Technological advancements have also played a crucial role, with fintech lenders able to offer more efficient and convenient services. Fintech lenders charge higher interest rates than traditional banks and non-fintech shadow banks, suggesting that consumers are willing to pay a premium for the convenience and efficiency of fintech services. Additionally, fintech lenders use different information to set interest rates, leveraging big data and alternative sources of information. The paper also finds that fintech lenders are more likely to serve borrowers with lower credit scores and in areas with higher unemployment. This suggests that fintech lenders are targeting segments of the market that traditional banks have traditionally avoided. The results indicate that regulatory changes and technological advancements have both contributed to the growth of shadow banks, with regulation accounting for about 60% of the growth and technology accounting for about 30%. The remaining growth is attributed to other factors. The paper concludes that both regulatory and technological factors have played a significant role in the decline of traditional banks' market share in the mortgage market.