The curious case of falling mortgage capital requirements November 8, 2007 at 8:35 am
This table is from QIS5, the 5th (and latest) quantitative impact study into the effects of the new Basel Accord. Since Basel 2 was approved recently in the U.S. (markedly behind much of the rest of the world) I thought I would commemorate the date by looking at the effects of Basel 2.
Group 1 are the largest banks: Group 2 are somewhat smaller. What we see here is the impact on minimum capital requirements (MRC) of the various new rules. The big winner for both classes of banks is retail mortgages: these contribute falls of 7.6% and 12.6% respectively in total capital required. And which category of business is causing a massive credit and liquidity crunch, endangering institutions from banks through broker/dealers to bond insurers and money market funds? Oh, retail mortgages.
Update.Alea has a nice set of links and discussion on the procyclicality of the New Accord. I’m still not convinced that regulatory capital is that big a motivation unless it is scarce, but still the incentive structures in Basel 2 cannot be helping matters right now.