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The competitive effects of risk-based bank capital regulation: an example from U.S. mortgage markets

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Listed:
  • Diana Hancock
  • Andreas Lehnert
  • Wayne Passmore
  • Shane M. Sherlund

Abstract

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.

Suggested Citation

  • Diana Hancock & Andreas Lehnert & Wayne Passmore & Shane M. Sherlund, 2006. "The competitive effects of risk-based bank capital regulation: an example from U.S. mortgage markets," Finance and Economics Discussion Series 2006-46, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2006-46
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    References listed on IDEAS

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    Cited by:

    1. Richard Herring, 2007. "The Rocky Road to Implementation of Basel II in the United States," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 35(4), pages 411-429, December.
    2. Valentin Bolotnyy, 2014. "The Government-Sponsored Enterprises and the Mortgage Crisis: The Role of the Affordable Housing Goals," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 42(3), pages 724-755, September.

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    Keywords

    Government-sponsored enterprises ; Bank capital;

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