Capital requirements and mortgage pricing: Evidence from Basel II

Matteo Benetton, Peter Eckley, Nicola Garbarino, Liam Kirwin and Georgia Latsi

Journal of Financial Intermediation, 2021, vol. 48, issue C

Abstract: As a result of the Basel II reforms, capital requirements on UK mortgages fell substantially in coincidence with the financial crisis. We exploit a novel, loan-level dataset on within-lender variation in risk-weighted capital requirements and a triple-difference identification strategy to estimate the pass through of capital requirements to mortgage rates. We find that a 1pp lower risk-weighted capital requirement leads to a reduction in rates by 10–16bp on average, with stronger effects for less-capitalized lenders. The competitive advantage induced by multi-tier regulation also affects the composition of banks mortgage portfolios, with larger lenders specializing in lower risk loans. Finally, our results support the use of countercyclical capital requirements to sustain lending in a crisis.

Keywords: Capital regulation; Mortgages; Specialization; Risk-taking (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (11)

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Related works:
Working Paper: Specialisation in mortgage risk under Basel II (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:48:y:2021:i:c:s1042957320300371

DOI: 10.1016/j.jfi.2020.100883

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