The Journal of Real Estate Finance and Economics

, Volume 35, Issue 2, pp 197–219

Regulatory Capital Arbitrage and the Potential Competitive Impact of Basel II in the Market for Residential Mortgages


DOI: 10.1007/s11146-007-9033-y

Cite this article as:
Calem, P.S. & Follain, J.R. J Real Estate Finan Econ (2007) 35: 197. doi:10.1007/s11146-007-9033-y


U.S. banking regulators have proposed a bifurcated system of capital regulation where the largest, internationally active banking organizations would be subject to significantly more risk sensitive regulatory capital requirements than are currently in place, while most others would remain subject to the current rules. The proposed new capital regime has the potential to affect the competitive landscape among banking institutions, particularly in the area of residential mortgage lending. We analyze the potential competitive effects of the proposed, bifurcated regulatory capital system on competition in the residential mortgage market from the perspective of the theory of regulatory capital arbitrage. We then apply the theory and available evidence to perform some benchmark calculations that suggest a significant, potential shift of market share and income to the largest banking institutions in the mortgage market.


Mortgage credit risk Bank capital regulation Mortgage market structure 

Copyright information

© Springer Science+Business Media, LLC 2007

Authors and Affiliations

  1. 1.Freddie Mac, Housing Analysis and ResearchMcLeanUSA
  2. 2.NiskayunaUSA

Personalised recommendations