Nonbanks and Lending Standards in Mortgage Markets. The Spillovers from Liquidity Regulation
52 Pages Posted: 23 Feb 2017 Last revised: 29 Nov 2017
Date Written: November 2017
We study how variation in MBS premia generated by the U.S. liquidity coverage ratio (LCR) affects the composition of lenders and credit risk in the primary mortgage market. We find that LCR raised MBS spreads 2.5bp for every 10% increase in a given security's regulatory weight. This premium, through a general equilibrium channel, attracted nonbanks and originate-to-sell lenders towards the FHA market. It also led to increased credit supply for risky borrowers. LCR can explain 26% of nonbanks' growth in market share from 2013-2015.
Keywords: Lending Standards, LCR, Liquidity, Mortgages, Nonbanks, FHA, GSEs, MBS
JEL Classification: G12, G18, G21, G23, E32, E44
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