Risk heterogeneity and credit supply: evidence from the mortgage market

These papers report on research carried out by, or under the supervision of, the external members of the Monetary Policy Committee (MPC) and their economic staff.
Published on 22 February 2010

External MPC Unit Discussion Paper No. 29

Timothy Besley, Neil Meads and Paolo Surico

This paper uses a unique data set on more than 600,000 mortgage contracts to estimate a credit supply function which allows for risk-heterogeneity. Non-linearity is modelled using quantile regressions. We propose an instrumental variable approach in which changes in the tax treatment of housing transactions are used as an instrument for loan demand. The results are suggestive of considerable risk heterogeneity with riskier borrowers penalised more for borrowing more.

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