Capital requirements and mortgage pricing: Evidence from Basel II |
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| Affiliation: | 1. Haas School of Business, University of California, Finance 3001 Derby Street, Berkeley, CA 94705, United States;2. Bank of England, United Kingdom;3. Deliveroo, United Kingdom;4. Ernst & Young, United Kingdom;1. D’Amore-McKim School of Business, Northeastern University, USA;2. Olin Business School, Washington University in St. Louis, USA;1. Federal Reserve Board, Division of Monetary Affairs, Board of Governors of the Federal Reserve System, USA;2. Robert Day School of Economics and Finance, Claremont McKenna College, USA;1. Finance area, INSEAD, 1 Ayer Rajah Avenue, Singapore 138676;2. University of Vienna, Oskar-Morgenstern-Platz 1, Wien 1090, Austria |
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| Abstract: | As a result of the Basel II reforms, capital requirements on UK mortgages fell substantially in coincidence with the financial crisis. We exploit a novel, loan-level dataset on within-lender variation in risk-weighted capital requirements and a triple-difference identification strategy to estimate the pass through of capital requirements to mortgage rates. We find that a 1pp lower risk-weighted capital requirement leads to a reduction in rates by 10–16bp on average, with stronger effects for less-capitalized lenders. The competitive advantage induced by multi-tier regulation also affects the composition of banks mortgage portfolios, with larger lenders specializing in lower risk loans. Finally, our results support the use of countercyclical capital requirements to sustain lending in a crisis. |
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