Capital Requirements, Risk Shifting and the Mortgage Market

41 Pages Posted: 18 Apr 2016

Multiple version iconThere are 2 versions of this paper

Date Written: April 2016

Abstract

We study the effect of changes to bank-specific capital requirements on mortgage loan supply with a new loan-level dataset containing all mortgages issued in the UK between 2005Q2 and 2007Q2. We find that a rise of a 100 basis points in capital requirements leads to a 5.4% decline in individual loan size by bank. Loans issued by competing banks rise by roughly the same amount, which is indicative of credit substitution. Borrowers with an impaired credit history (verified income) are not (most) affected. This is consistent with origination of riskier loans to grow capital by raising retained earnings. No evidence for credit substitution of non-bank finance companies is found.

Keywords: Capital requirements, credit substitution., loan-level data, mortgage market

JEL Classification: G21, G28

Suggested Citation

Uluc, Arzu and Wieladek, Tomasz, Capital Requirements, Risk Shifting and the Mortgage Market (April 2016). CEPR Discussion Paper No. DP11214, Available at SSRN: https://ssrn.com/abstract=2766542

Arzu Uluc (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Tomasz Wieladek

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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