Keywords: Capital, mortgage, risk, regulation
Abstract: We develop estimates of risk-based capital requirements for single-family
mortgage loans held in portfolio by financial intermediaries. Our method
relies on simulation of default and loss probability distributions via
simulation of changes in economic variables with conditional default
probabilities calibrated to recent actual mortgage loan performance data
from the 1990s. Based on simulations with varying input parameters, we find
that appropriate capital charges for credit risk vary substantially with loan
or borrower characteristics and are generally below the current regulatory
standard. These factors may help explain the high degree of securitization,
or regulatory capital arbitrage, observed for this asset category.
Full paper (153 KB PDF)
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Last update: December 19, 2001