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Lenders' Competition and Macro-prudential Regulation: A Model of the UK Mortgage Supermarket

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  • Matteo Benetton

    (London School of Economics)

Abstract

This paper develops and estimates an empirical model of the UK mortgage market and studies the effect of macro-prudential regulation on lending activity. We estimate a discrete-continuous choice demand model of mortgages with a new administrative dataset of the universe of residential mortgage originations. Borrowers decide jointly the lender, the rate type and the leverage, facing a non-linear price schedule and affordability constraints on their choice sets. We find: 1) 10 basis points increase in the interest rate decreases the market share of a product by 6% on average; 2) a 1% increase in the interest rate decreases loan demand by about 4%; 3) both elasticities are heterogeneous across leverage levels, borrower types and lenders. We derive a pricing equation that takes into account default and refinancing risk and we characterise the Nash-Bertrand equilibrium, subject to risk-adjusted capital constraints. We use the estimated parameters to study the pass-through of capital requirements in two different counterfactual regimes.

Suggested Citation

  • Matteo Benetton, 2017. "Lenders' Competition and Macro-prudential Regulation: A Model of the UK Mortgage Supermarket," 2017 Meeting Papers 1001, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:1001
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