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Capital requirements, monetary policy and risk shifting in the mortgage market

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  • Uluc, Arzu
  • Wieladek, Tomasz

Abstract

We study the effect of changes to bank-specific capital requirements on mortgage loans with a new loan-level dataset containing all new 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 4% decline in individual mortgage loan size. Borrowers with an impaired credit history (verified income) are not (most) affected. This is consistent with the origination of riskier loans to grow capital by raising retained earnings. We then examine the interaction of capital requirements and monetary policy. This suggests that a monetary policy tightening may mitigate the loan contraction associated with higher capital requirements, as maturity transformation allows the affected bank to profit from a steeper yield curve and raise capital through retained earnings. Overall, our findings in this paper indicate that retained earnings are an important channel of adjustment to capital requirements.

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  • Uluc, Arzu & Wieladek, Tomasz, 2018. "Capital requirements, monetary policy and risk shifting in the mortgage market," Journal of Financial Intermediation, Elsevier, vol. 35(PB), pages 3-16.
    • Handle: RePEc:eee:jfinin:v:35:y:2018:i:pb:p:3-16
    DOI: 10.1016/j.jfi.2018.06.007
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    Cited by:

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    2. De Marco, Filippo & Kneer, Christiane & Wieladek, Tomasz, 2021. "The real effects of capital requirements and monetary policy: Evidence from the United Kingdom," Journal of Banking & Finance, Elsevier, vol. 133(C).
    3. Carletti, Elena & Marquez, Robert & Petriconi, Silvio, 2020. "The redistributive effects of bank capital regulation," Journal of Financial Economics, Elsevier, vol. 136(3), pages 743-759.
    4. Ambrocio, Gene & Hasan, Iftekhar & Jokivuolle, Esa & Ristolainen, Kim, 2020. "Are bank capital requirements optimally set? Evidence from researchers’ views," Journal of Financial Stability, Elsevier, vol. 50(C).
    5. Stefanie Behncke, 2023. "Effects of Macroprudential Policies on Bank Lending and Credit Risks," Journal of Financial Services Research, Springer;Western Finance Association, vol. 63(2), pages 175-199, April.
    6. Choi, Dong Beom & Eisenbach, Thomas M. & Yorulmazer, Tanju, 2021. "Watering a lemon tree: Heterogeneous risk taking and monetary policy transmission," Journal of Financial Intermediation, Elsevier, vol. 47(C).
    7. Thakor, Anjan V., 2021. "Politics, credit allocation and bank capital requirements," Journal of Financial Intermediation, Elsevier, vol. 45(C).
    8. Thakor, Anjan V., 2020. "Fintech and banking: What do we know?," Journal of Financial Intermediation, Elsevier, vol. 41(C).
    9. Dafermos, Yannis & Nikolaidi, Maria, 2022. "Greening capital requirements," Greenwich Papers in Political Economy 37779, University of Greenwich, Greenwich Political Economy Research Centre.
    10. Byeongchan An & Robert M. Bushman & Anya V. Kleymenova & Rimmy E. Tomy, 2022. "Social Externalities of Bank Enforcement Actions: The Case of Minority Lending," Finance and Economics Discussion Series 2022-036, Board of Governors of the Federal Reserve System (U.S.).
    11. Eva Horvatova, 2020. "Twenty Years of Mortgage Banking in Slovakia," IJFS, MDPI, vol. 8(3), pages 1-30, September.
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    More about this item

    Keywords

    Capital requirements; Loan-level data; Mortgage market; Monetary policy;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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