U.S. banks are losing market share in lending despite the presence of fewer non-bank competitors now, than there were a few years ago. The U.S. government has been eating into their market share, according to Deutsche Bank analyst Matt O’Connor.
Government agencies have expanded home ownership through government-sponsored enterprises (GSEs) and through buying mortgage backed securities: According to O’Connor:
…They have crowded banks out of this market by making it uneconomical for them to portfolio quality residential mortgage loans. Additionally, investor demand for middle market/large corporate backed bonds have caused tighter spreads—making it difficult for banks to compete given capital and liquidity requirements on these loans.”
In the pre-crisis era i.e. 1986 – 2007, bank share of lending declined from 48% to 30% or at a pace of about 1% a year. The decline was caused by the expansion of non-banks, and the growth of the capital markets, markets in which individuals and institutions trade financial securities to raise funds. Oddly though, market share kept declining during and after the crisis, with lending falling from 30.2% at the end of 2007 to 29% at the end of March this year.
Regulations like Dodd-Frank discourage big banks from growing and banks are now required to hold higher capital and liquidity under Basel III requirements. Banks can expect to win bank some of that market share if there are changes to mortgage finance models in the future.
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