TITLE:
Disproportionate Safety Preference and the Innovation of Fintech Shadow Banking
AUTHORS:
Hammad Siddiqi
KEYWORDS:
Fintech Shadow Banks, Certain Utility, Uncertain Utility, Securitization
JOURNAL NAME:
Theoretical Economics Letters,
Vol.12 No.3,
June
9,
2022
ABSTRACT: There has been a dramatic shift in financial
intermediation in the last 10 - 15 years from traditional banks to shadow banks
(non-depository institutions that rely on originate-to-distribute lending
model). We link this rise to an emerging literature that shows that certain and
uncertain utility functions are different with a disproportionate preference
for certainty. We show that such a preference plays a role in diverting lending
away from the traditional banking model to the shadow banking model.
Furthermore, a low interest-rate environment emerges as the key contributing
factor in the dramatic rise of shadow banking.