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STICERD Work in Progress Seminars

Competition and macro-prudential regulation: An empirical model of the UK mortgage supermarket

Matteo Benetton (Department of Economics, LSE)

Friday 05 May 2017 13:00 - 14:00

Due to the onging coronavirus outbreak, many of our seminars and public events this year will continue as online seminars. Please check our website listings and Twitter feed @STICERD_LSE for updates.

About this event

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 mortgage product and the loan size facing a non-linear price schedule and affordability constraints on their choice sets. We derive a pricing equation that takes into account default and refinancing risks and we characterize the Nash-Bertrand equilibrium, subject to risk-adjusted capital constraints. We find that: 1) a 1% increase in the interest rate decreases loan demand by 2% and product demand by 3%, on average; 2) both elasticities are heterogeneous across leverage levels, borrower types and lenders; 3) a 1% higher risk-weight increase lenders' marginal cost by about 1%. We use the estimated parameters to study the pass-through of capital requirements in two different counterfactual regimes.