White Papers for Basel II Capital Accord (Basel II)

An Analysis of the Potential Competitive Impacts of Basel II Capital Standards on U.S. Mortgage Rates and Mortgage Securitization

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U.S. regulators have proposed that the new Basel II capital standards would be required of only the largest or most internationally active depositories, while other depositories could choose between opting into such standards or remaining under the existing capital standards. We consider potential impacts of this “bifurcated” approach on competition in the market for residential mortgages. Specifically, we analyze whether this approach could translate into: (1) a cost advantage, and correspondingly a pricing and/or profit advantage, in mortgage markets for the depository institutions that adopt the new Basel II standards, and/or (2) provide incentives for these adopters to retain mortgages in their own portfolios. In the prime mortgage markets, we find that mortgage rates are likely to be largely unaffected by the adoption of a bifurcated Basel II capital standard because such rates would continue to reflect GSE capital requirements. In addition, prime mortgages are priced using uniform pricing methods, which suggests that a pricing advantage would not result from differences in capital requirements across depositories. Without a pricing advantage, an adopter’s market share of prime mortgage funding would be unaffected. As for near-prime and subprime loans, we conclude that capital allocated to back residential mortgages would continue to reflect market-determined capital needs, and therefore, their mortgage rates also would remain unchanged

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