Capital Requirements, Risk Shifting and the Mortgage Market

37 Pages Posted: 22 Dec 2015

Multiple version iconThere are 2 versions of this paper

Date Written: December 2015

Abstract

We study the effect of changes to bank-specific capital requirements on mortgage loan supply with a new loan-level data set containing all mortgages issued in the United Kingdom between 2005 Q2 and 2007 Q2. 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, loan-level data, mortgage market, credit substitution

JEL Classification: G21, G28

Suggested Citation

Uluc, Arzu and Wieladek, Tomasz, Capital Requirements, Risk Shifting and the Mortgage Market (December 2015). Bank of England Working Paper No. 572. Available at SSRN: https://ssrn.com/abstract=2706485 or http://dx.doi.org/10.2139/ssrn.2706485

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

Register to save articles to
your library

Register

Paper statistics

Downloads
24
Abstract Views
288
PlumX Metrics