Lenders' Competition and Macro-prudential Regulation: A Model of the UK Mortgage Supermarket
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Matteo Benetton: London School of Economics
No 1001, 2017 Meeting Papers from Society for Economic Dynamics
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.
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:1001
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