This paper relates the striking growth in non-bank lending to the secular decline in interest rates. Low interest rates hurt banks by compressing the spreads they can earn. Using a shift-share empirical design based on historical balance sheet composition, we show that banks exposed to declining interest rates had lower profitability and equity growth, and contracted lending. In turn, the market share of non-banks in the mortgage market increased in counties with exposed banks. This response is mainly at the extensive margin, driven by new non-banks entering counties with weaker in cumbent banks. Our results complement leading explanations based on regulatory
arbitrage and technological advantages of non-banks over traditional lenders.
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