Staff Working Paper No. 639: Specialisation in mortgage risk under Basel II
Matteo Benetton, Peter Eckley, Nicola Garbarino, Liam Kirwin and Georgia Latsi
Since Basel II was introduced in 2008, two approaches to calculating bank capital requirements have co-existed: lenders’ internal models, and a less risk-sensitive standardised approach. Using a unique dataset covering 7 million UK mortgages for 2005–15, and novel identification, we provide empirical evidence that the differences between these approaches cause lenders to specialise. This leads to systemic concentration of high-risk mortgages in lenders with less sophisticated risk management. Our results have broad implications for the design of the international bank capital framework.