Matteo Benetton, Peter Eckley, Nicola Garbarino, Liam Kirwin and Georgia Latsi.
Do financial regulations change bank behaviour? Does this create new risks? Under Basel II, some banks set capital requirements based on their internal risk models; others use an off-the-shelf standardised approach. These two methodologies can produce very different capital requirements for similar assets. See Figure 1, which displays a snapshot of recent risk weights for UK mortgages. In a new working paper we show empirically that this discrepancy causes lenders to adjust their interest rates and to specialise in which borrowers they target.
Ask most young Britons about the housing market and they’ll undoubtedly have a personal anecdote to share. They may tell you about their struggle to get on the ladder, or how they’ve had to make ever larger concessions such as moving to the fringes of town. Or, they may tell you of their plans to take on a mammoth mortgage because the alternative—waiting a little longer—means that what is in reach now will likely be out of reach soon enough. This post empirically underpins what has been anecdotally obvious for some time: that the burden of debt is disproportionately falling on the young, and much more so than any other time in the last 20 years.