The competitive effects of risk-based bank capital regulation: an example from U.S. mortgage markets
Basel II bank capital regulations are designed to be substantially more risk sensitive than the current regulations. In the United States, only the largest banks would be required to adopt Basel II; other depositories could choose to adopt such standards or to remain under the Basel I capital standards. We consider possible effects of this two-pronged or "bifurcated" approach on the market for residential mortgages. Specifically, we analyze whether those institutions that adopt Basel II will enjoy lower costs than nonadopters and whether they have an incentive to retain mortgages in their own portfolios. We find that (1) despite the large differences in regulatory capital requirements between adopters and nonadopters, it is unlikely that there will be any measurable effect of Basel II implementation on most mortgage rates and, consequently, any direct impact on the competition between adopters and nonadopters for originating or holding residential mortgages; (2) the most significant competitive impact may be felt among mortgage securitizers; and (3) adopters might have increased profits from some mortgages relative to nonadopters because they will capture some of the deadweight losses that occur under the current regulatory regime, but nonadopters would likely retain their market shares.
|Date of creation:||2006|
|Contact details of provider:|| Postal: 20th Street and Constitution Avenue, NW, Washington, DC 20551|
Web page: http://www.federalreserve.gov/
More information through EDIRC
|Order Information:||Web: http://www.federalreserve.gov/pubs/feds/fedsorder.html|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Steven A. Sharpe, 2002.
"Reexamining Stock Valuation and Inflation: The Implications Of Analysts' Earnings Forecasts,"
The Review of Economics and Statistics,
MIT Press, vol. 84(4), pages 632-648, November.
- Steven A. Sharpe, 2001. "Reexamining stock valuation and inflation: the implications of analysts' earnings forecasts," Finance and Economics Discussion Series 2001-32, Board of Governors of the Federal Reserve System (U.S.).
- Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
- Barakova, Irina & Bostic, Raphael W. & Calem, Paul S. & Wachter, Susan M., 2003.
"Does credit quality matter for homeownership?,"
Journal of Housing Economics,
Elsevier, vol. 12(4), pages 318-336, December.
- Irina Barakova & Raphael Bostic & Paul Calem & Susan Wachter, 2003. "Does Credit Quality Matter for Homeownership?," Working Paper 8608, USC Lusk Center for Real Estate.
- Irina Barakova & Raphael Bostic & Paul Calem & Susan Wachter, . "Does Credit Quality Matter for Homeownership?," Zell/Lurie Center Working Papers 410, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
- Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
- Jones, David, 2000. "Emerging problems with the Basel Capital Accord: Regulatory capital arbitrage and related issues," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 35-58, January.
- Wayne Passmore, 1992. "The influence of risk-adjusted capital regulations on asset allocation by savings and loans," Finance and Economics Discussion Series 213, Board of Governors of the Federal Reserve System (U.S.).
- Glenn B. Canner & Wayne Passmore & Brian J. Surette, 1996. "Distribution of credit risk among providers of mortgages to lower- income and minority homebuyers," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Dec, pages 1077-1102.
- W. Scott Frame & Lawrence J. White, 2004.
"Emerging competition and risk-taking incentives at Fannie Mae and Freddie Mac,"
922, Federal Reserve Bank of Chicago.
- Lawrence J. White & W. Scott Frame, 2004. "Emerging Competition and Risk-Taking Incentives at Fannie Mae and Freddie Mac," Working Papers 04-02, New York University, Leonard N. Stern School of Business, Department of Economics.
- W. Scott Frame & Lawrence J. White, 2004. "Emerging competition and risk-taking incentives at Fannie Mae and Freddie Mac," FRB Atlanta Working Paper 2004-4, Federal Reserve Bank of Atlanta.
- Calem, Paul S. & LaCour-Little, Michael, 2004. "Risk-based capital requirements for mortgage loans," Journal of Banking & Finance, Elsevier, vol. 28(3), pages 647-672, March.
- Peter M. DeMarzo, 2005. "The Pooling and Tranching of Securities: A Model of Informed Intermediation," Review of Financial Studies, Society for Financial Studies, vol. 18(1), pages 1-35.
- Duca, John V & Rosenthal, Stuart S, 1994. "Do Mortgage Rates Vary Based on Household Default Characteristics? Evidence on Rate Sorting and Credit Rationing," The Journal of Real Estate Finance and Economics, Springer, vol. 8(2), pages 99-113, March.
- Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Jones, David & Mingo, John, 1999. "Credit risk modeling and internal capital allocation processes: implications for a models-based regulatory bank capital standard," Journal of Economics and Business, Elsevier, vol. 51(2), pages 79-108, March.
- Mingo, John J., 2000. "Policy implications of the Federal Reserve study of credit risk models at major US banking institutions," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 15-33, January.
- Diana Hancock & Andreas Lehnert & Wayne Passmore & Shane M. Sherlund, 2005. "An analysis of the potential competitive impacts of Basel II capital standards on U.S. mortgage rates and mortgage securitization," Basel II White Paper 3, Board of Governors of the Federal Reserve System (U.S.).
- Robert B. Avery & Paul S. Calem & Glenn B. Canner, 2004. "Credit report accuracy and access to credit," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Sum, pages 297-322.
- Wendy Edelberg, 2003. "Risk-based pricing of interest rates in household loan markets," Finance and Economics Discussion Series 2003-62, Board of Governors of the Federal Reserve System (U.S.).
- Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
When requesting a correction, please mention this item's handle: RePEc:fip:fedgfe:2006-46. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Franz Osorio)
If references are entirely missing, you can add them using this form.