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Estimating regulatory capital requirements for reverse mortgages. An international comparison

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  • Fuente, Iván de la
  • Navarro, Eliseo
  • Serna, Gregorio

Abstract

In this paper, we estimate the value of the no-negative-equity guarantee (NNEG) embedded in reverse mortgage contracts and develop a method for calculating regulatory capital requirements according to Basel II and III. We employ a Monte Carlo simulation method that assumes an ARMA-EGARCH process for house prices in four European countries: France, Germany, Spain and the United Kingdom. The results show different estimated values for the NNEG among countries. Specifically, the value of the NNEG tends to be related to the level of the interest rates, the rental yield and house price volatility in each country, as well as the age of the borrower. Different values for value-at-risk and the expected shortfall among countries are also found, which depend on the volatility of each country’s house price series.

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  • Fuente, Iván de la & Navarro, Eliseo & Serna, Gregorio, 2021. "Estimating regulatory capital requirements for reverse mortgages. An international comparison," International Review of Economics & Finance, Elsevier, vol. 74(C), pages 239-252.
    • Handle: RePEc:eee:reveco:v:74:y:2021:i:c:p:239-252
    DOI: 10.1016/j.iref.2021.03.001
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    References listed on IDEAS

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    Cited by:

    1. Tsai, Pei-Hsuan & Wang, Ying-Wei & Chang, Wen-Chang, 2023. "Hybrid MADM-based study of key risk factors in house-for-pension reverse mortgage lending in Taiwan's banking industry," Socio-Economic Planning Sciences, Elsevier, vol. 86(C).
    2. de la Fuente, Iván & Navarro, Eliseo & Serna, Gregorio, 2023. "Proposal for calculating regulatory capital requirements for reverse mortgages," Socio-Economic Planning Sciences, Elsevier, vol. 88(C).

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    More about this item

    Keywords

    Reverse mortgages; Option pricing; No-negative-equity guarantee; Mortality modeling; House price modeling; Regulatory capital requirements;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped; Non-Labor Market Discrimination
    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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