Keywords: bank capital regulation, mortgages, market competition, government-sponsored enterprises, GSEs
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.
Full paper (322 KB PDF)
| Full Paper (Screen Reader Version)
Home | FEDS | List of 2006 FEDS papers
To comment on this site, please fill out our feedback form.
Last update: December 21, 2006