Working Paper
Risk-based capital requirements for mortgage loans
Abstract: We develop estimates of risk-based capital requirements for single-family mortgage loans held in portfolio by financial intermediaries. Our method relies on simulation of default and loss probability distributions via simulation of changes in economic variables with conditional default probabilities calibrated to recent actual mortgage loan performance data from the 1990s. Based on simulations with varying input parameters, we find that appropriate capital charges for credit risk vary substantially with loan or borrower characteristics and are generally below the current regulatory standard. These factors may help explain the high degree of securitization, or regulatory capital arbitrage, observed for this asset category.
Keywords: Mortgages; Loans; Risk;
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Bibliographic Information
Provider: Board of Governors of the Federal Reserve System (U.S.)
Part of Series: Finance and Economics Discussion Series
Publication Date: 2001
Number: 2001-60