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Risk-based capital requirements for mortgage loans

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  • Paul S. Calem
  • Michael LaCour-Little

Abstract

We develop estimates of risk-based capital requirements for single-family mortgage loans held in portfolio by financial intermediaries. Our method relies on simulation of default and loss probability distributions via simulation of changes in economic variables with conditional default probabilities calibrated to recent actual mortgage loan performance data from the 1990s. Based on simulations with varying input parameters, we find that appropriate capital charges for credit risk vary substantially with loan or borrower characteristics and are generally below the current regulatory standard. These factors may help explain the high degree of securitization, or regulatory capital arbitrage, observed for this asset category.

Suggested Citation

  • Paul S. Calem & Michael LaCour-Little, 2001. "Risk-based capital requirements for mortgage loans," Finance and Economics Discussion Series 2001-60, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2001-60
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    References listed on IDEAS

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    6. Jones, David, 2000. "Emerging problems with the Basel Capital Accord: Regulatory capital arbitrage and related issues," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 35-58, January.
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    9. Campbell, Tim S & Dietrich, J Kimball, 1983. "The Determinants of Default on Insured Conventional Residential Mortgage Loans," Journal of Finance, American Finance Association, vol. 38(5), pages 1569-1581, December.
    10. Gordy, Michael B., 2000. "A comparative anatomy of credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 119-149, January.
    11. Brent W. Ambrose & Michael LaCour‐Little, 2001. "Prepayment Risk in Adjustable Rate Mortgages Subject to Initial Year Discounts: Some New Evidence," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 29(2), pages 305-327.
    12. Crouhy, Michel & Galai, Dan & Mark, Robert, 2000. "A comparative analysis of current credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 59-117, January.
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    Cited by:

    1. Henrik Andersen, 2009. "Norwegian banks in a recession: Procyclical implications of Basel II," Working Paper 2009/04, Norges Bank.
    2. Tor Jacobson & Jesper Lindé & Kasper Roszbach, 2005. "Credit Risk Versus Capital Requirements under Basel II: Are SME Loans and Retail Credit Really Different?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 28(1), pages 43-75, October.
    3. Simone Varotto, 2007. "Tests on the Accuracy of Basel II," ICMA Centre Discussion Papers in Finance icma-dp2007-09, Henley Business School, University of Reading.
    4. Perli, Roberto & Nayda, William I., 2004. "Economic and regulatory capital allocation for revolving retail exposures," Journal of Banking & Finance, Elsevier, vol. 28(4), pages 789-809, April.
    5. Cowan, Adrian M. & Cowan, Charles D., 2004. "Default correlation: An empirical investigation of a subprime lender," Journal of Banking & Finance, Elsevier, vol. 28(4), pages 753-771, April.
    6. Calem, Paul S. & LaCour-Little, Michael, 2004. "Risk-based capital requirements for mortgage loans," Journal of Banking & Finance, Elsevier, vol. 28(3), pages 647-672, March.

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    Keywords

    Mortgages; Loans; Risk;
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