The Financial Innovation of Fintech Shadow Banking

Abstract

A fundamental shift has taken place in the global banking sector due to the rise of fintech shadow banking in the last decade and a half. We connect this increase to recent research that demonstrates the difference between certain and uncertain utility functions and the disproportionate preference for certainty. We demonstrate how this preference contributes to the shift in lending from the conventional banking model to the shadow banking model. Furthermore, the significant expansion of shadow banking is largely attributable to the low interest rate environment.