Mortgage Companies and Regulatory Arbitrage
Yuliya S. Demyanyk
Federal Reserve Bank of Cleveland
University of Virginia - Darden School of Business
May 3, 2013
FRB of Cleveland Working Paper WP 12-20R
Darden Business School Working Paper No. 2051001
Mortgage companies (MCs) do not fall under the strict regulatory regime applicable to depository institutions. We empirically show that the resulting regulatory arbitrage allowed bank holding companies (BHCs) to circumvent capital requirements and avoid loan-related losses. As compared to bank subsidiaries, MC subsidiaries of BHCs originated riskier mortgages characterized by borrowers with lower credit scores, lower incomes, higher loan-to-income ratios, and higher default rates. Our results imply that regulation had the capacity to prevent the deterioration of pre-crisis lending standards, but only if consistently applied and enforced.
Number of Pages in PDF File: 45
Keywords: Banking Regulation, Regulatory Arbitrage, Shadow Banking, Lending Standards, Mortgage, Foreclosure, Bank, Crisis
JEL Classification: G21, G28, D12working papers series
Date posted: May 5, 2012 ; Last revised: May 5, 2013
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