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Capital requirements and mortgage pricing: Evidence from Basel II

Author

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

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.

Suggested Citation

  • Benetton, Matteo & Eckley, Peter & Garbarino, Nicola & Kirwin, Liam & Latsi, Georgia, 2021. "Capital requirements and mortgage pricing: Evidence from Basel II," Journal of Financial Intermediation, Elsevier, vol. 48(C).
    • Handle: RePEc:eee:jfinin:v:48:y:2021:i:c:s1042957320300371
    DOI: 10.1016/j.jfi.2020.100883
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    Cited by:

    1. Tuuli, Saara, 2019. "Model-based regulation and firms' access to finance," Bank of Finland Research Discussion Papers 4/2019, Bank of Finland.
    2. Matteo Benetton, 2017. "Lenders' Competition and Macro-prudential Regulation: A Model of the UK Mortgage Supermarket," 2017 Meeting Papers 1001, Society for Economic Dynamics.
    3. Nam, Rachel J., 2022. "Open banking and customer data sharing: Implications for FinTech borrowers," SAFE Working Paper Series 364, Leibniz Institute for Financial Research SAFE.
    4. Fisher, Paul & Grout, Paul, 2017. "Competition and prudential regulation," Bank of England working papers 675, Bank of England.
    5. Viral V. Acharya & Katharina Bergant & Matteo Crosignani & Tim Eisert & Fergal Mccann, 2022. "The Anatomy of the Transmission of Macroprudential Policies," Journal of Finance, American Finance Association, vol. 77(5), pages 2533-2575, October.
    6. Aikman, David & Haldane, Andrew & Hinterschweiger, Marc & Kapadia, Sujit, 2018. "Rethinking financial stability," Bank of England working papers 712, Bank of England.
    7. Dominika Ehrenbergerová & Martin Hodula & Zuzana Gric, 2022. "Does capital-based regulation affect bank pricing policy?," Journal of Regulatory Economics, Springer, vol. 61(2), pages 135-167, April.
    8. Dal Borgo, Mariela, 2022. "Internal models for deposits: Effects on banks' capital and interest rate risk of assets," Journal of Banking & Finance, Elsevier, vol. 135(C).
    9. Benbouzid, Nadia & Kumar, Abhishek & Mallick, Sushanta K. & Sousa, Ricardo M. & Stojanovic, Aleksandar, 2022. "Bank credit risk and macro-prudential policies: Role of counter-cyclical capital buffer," Journal of Financial Stability, Elsevier, vol. 63(C).
    10. Song, Fenghua & Thakor, Anjan, 2022. "Ethics, capital and talent competition in banking," Journal of Financial Intermediation, Elsevier, vol. 52(C).
    11. Saha, Asish & Rooj, Debasis & Sengupta, Reshmi, 2023. "Macroprudential Policy and mortgage leverage decisions—Evidence from micro data," Economic Analysis and Policy, Elsevier, vol. 80(C), pages 1430-1444.
    12. Kabundi, Alain & De Simone, Francisco Nadal, 2022. "Euro area banking and monetary policy shocks in the QE era," Journal of Financial Stability, Elsevier, vol. 63(C).
    13. repec:zbw:bofrdp:2019_004 is not listed on IDEAS
    14. Tuuli, Saara, 2019. "Model-based regulation and firms' access to finance," Research Discussion Papers 4/2019, Bank of Finland.
    15. Miller, Sam & Wanengkirtyo, Boromeus, 2020. "Liquidity and monetary transmission: a quasi-experimental approach," Bank of England working papers 891, Bank of England.
    16. Martin Birn & Olivier de Bandt & Simon Firestone & Matías Gutiérrez Girault & Diana Hancock & Tord Krogh & Hitoshi Mio & Donald P. Morgan & Ajay Palvia & Valerio Scalone & Michael Straughan & Arzu Ulu, 2020. "The Costs and Benefits of Bank Capital—A Review of the Literature," JRFM, MDPI, vol. 13(4), pages 1-25, April.
    17. Cristina Jude & Grégory Levieuge, 2024. "Doubling Down: The Synergy of CCyB Release and Monetary Policy Easing," Working papers 961, Banque de France.
    18. Donat Kim & Eszter Raciborski & Balint Vargedo, 2024. "Experiences from the MNB's Green Preferential Capital Requirement Programme and the Extension of the Programme," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 23(3), pages 193-209.
    19. Damen, Sven & Schildermans, Stef, 2022. "Capital requirements, mortgage rates and house prices," Journal of Banking & Finance, Elsevier, vol. 143(C).
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    More about this item

    Keywords

    Capital regulation; Mortgages; Specialization; Risk-taking;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • 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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