Leverage Regulation and Market Structure: A Structural Model of the U.K. Mortgage Market

Abstract

I develop a structural model of mortgage demand and lender competition to study how leverage regulation affects the U.K. mortgage market. Using variation in risk-weighted capital requirements across lenders and mortgages with different loan-to-values (LTVs), I show that a 1-percentage-point increase in risk-weighted capital requirements increases lenders' marginal cost of originating mortgages by about 26 basis points (11%) on average. I use the estimated model to study proposed leverage regulations. Counterfactual analyses show that large lenders exploit a regulatory cost advantage, which increases concentration by about 20%, and suggest that banning high-LTV mortgages may reduce large lenders' equity buffer.