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Lenders' Competition and Macro-prudential Regulation: A Model of the UK Mortgage Supermarket

Matteo Benetton
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Matteo Benetton: London School of Economics

No 1001, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: This paper develops and estimates an empirical model of the UK mortgage market and studies the effect of macro-prudential regulation on lending activity. We estimate a discrete-continuous choice demand model of mortgages with a new administrative dataset of the universe of residential mortgage originations. Borrowers decide jointly the lender, the rate type and the leverage, facing a non-linear price schedule and affordability constraints on their choice sets. We find: 1) 10 basis points increase in the interest rate decreases the market share of a product by 6% on average; 2) a 1% increase in the interest rate decreases loan demand by about 4%; 3) both elasticities are heterogeneous across leverage levels, borrower types and lenders. We derive a pricing equation that takes into account default and refinancing risk and we characterise the Nash-Bertrand equilibrium, subject to risk-adjusted capital constraints. We use the estimated parameters to study the pass-through of capital requirements in two different counterfactual regimes.

Date: 2017
New Economics Papers: this item is included in nep-com, nep-rmg and nep-ure
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