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Capital Requirements, Risk Shifting and the Mortgage Market

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  • Uluc, Arzu
  • Wieladek, Tomasz

Abstract

We study the effect of changes to bank-specific capital requirements on mortgage loan supply with a new loan-level dataset containing all mortgages issued in the UK between 2005Q2 and 2007Q2. 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.

Suggested Citation

  • Uluc, Arzu & Wieladek, Tomasz, 2016. "Capital Requirements, Risk Shifting and the Mortgage Market," CEPR Discussion Papers 11214, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:11214
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    1. repec:bog:econbl:y:2016:i:43:p:19 is not listed on IDEAS
    2. repec:bog:econbl:y:2016:i:43:p:19-29 is not listed on IDEAS
    3. repec:bog:econbl:y:2016:i:43:p:55-75 is not listed on IDEAS
    4. repec:bog:econbl:y:2016:i:43:p:7 is not listed on IDEAS
    5. Eckley, Peter & Benetton, Matteo & Latsi, Georgia & Garbarino, Nicola & Kirwin, Liam, 2017. "Specialisation in mortgage risk under Basel II," Bank of England working papers 639, Bank of England.
    6. repec:bog:econbl:y:2016:i:43:p:31-53 is not listed on IDEAS
    7. repec:bog:econbl:y:2016:i:43:p:31 is not listed on IDEAS
    8. repec:bog:econbl:y:2016:i:43:p:7-17 is not listed on IDEAS
    9. Tölö, Eero & Miettinen, Paavo, 2018. "How do shocks to bank capital affect lending and growth?," Research Discussion Papers 25/2018, Bank of Finland.
    10. repec:bog:econbl:y:2016:i:43:p:55 is not listed on IDEAS
    11. repec:bis:bisifc:46-31 is not listed on IDEAS
    12. repec:eee:jbfina:v:96:y:2018:i:c:p:277-291 is not listed on IDEAS
    13. Tracey, Belinda & Schnittker, Christian & Sowerbutts, Rhiannon, 2017. "Bank capital and risk-taking: evidence from misconduct provisions," Bank of England working papers 671, Bank of England, revised 09 Oct 2018.
    14. Stijn Ferrari & Mara Pirovano & Pablo Rovira Kaltwasser, 2016. "Systemic risk, macroprudential policy, bank capital requirements, real estate," Working Paper Research 306, National Bank of Belgium.
    15. repec:bis:biscgf:60 is not listed on IDEAS

    More about this item

    Keywords

    Capital requirements; credit substitution.; loan-level data; mortgage market;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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