This paper proposes a novel measure of financial fragility for shadow bank mortgage lenders and investigates its implications on credit supply and financial stability. The overall financial fragility of the shadow bank sector has been consistently increasing in recent years, reaching its highest value of the past decade in 2021. Financially fragile shadow banks take advantage of favorable regulatory spillover shocks to build their market share in the riskier segment of the market and lower their underwriting standards more than other shadow banks. Meanwhile, fragile shadow banks' credit supply is less elastic in response to demand shocks. Our results underline the importance of more regulatory attention to the fragility and destabilizing effects of shadow bank lenders.

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