Abstract
Financial regulation can affect both the size and composition of markets, and understanding those effects is critical to determine the extent to which such regulation hinders credit availability. In this paper, we study the effect of tighter banking regulation on the US residential mortgage market: a market characterized by lenders subject to different degrees of regulation. We disentangle the impact of tighter banking regulation from confounding factors related to the underlying business cycle by exploiting cross-sectional heterogeneity in the exposure of different lenders and different geographies to the policy change. We find that the regulation has resulted in a change in the composition of the market - less regulated banks and non-bank mortgage companies now have a larger share of the origination market. However, since the tightening of the bank regulations, the counties most dependent on lending from the most heavily regulated banks have not experienced significantly slower aggregate origination or house price growth than less dependent counties.
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