Abstract
I develop a structural model of mortgage demand and lender competition to study how leverage regulation a ffects the equilibrium in the UK mortgage market. Using variation in risk-weighted capital requirements jointly across lenders and mortgages with di fferential loan-to-values, I show that a one-percentage-point increase in risk-weighted capital requirements increases lenders' marginal cost of originating mortgages by about 26 basis points (11 percent) for the average mortgage product. I use the estimated model to study proposed leverage regulations. Counterfactual analyses show that large lenders exploit a regulatory cost advantage, which increases concentration of mortgage originations by about 20 percent, and suggest that banning high loan-to-value mortgages may reduce large lenders' equity bu er.
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