(When) Do Banks React to Anticipated Capital Reliefs?

Abstract

We study how banks react to policy announcements during a representative policy cycle involving consultation and publication using a novel dataset on the population of all mortgage transactions and regulatory risk assessments of banks. We demonstrate that banks likely to benefit from lower capital requirements increase the size of this capital relief by permanently investing into low risk assets after the publication of the policy. In contrast, there is no evidence that they already reacted to the early step of the development of the policy, the publication of the consultation paper. We show how these results can be used to estimate a lower bound on the cost of capital for smaller banks, for which such estimates are typically difficult to obtain.

The greening of lending: mortgage pricing of energy transition risk

“…On the risk indicators, the average LTV was 0.81 and the average LTI was 3.75. These are all typical and expected for the UK mortgage market and are in line with the existing literature (Arnould et al, 2020;Guin et al, 2022).…”

“…In this paper, we examine whether banks accounted for energy-and climate-related financial risks in their mortgage pricing decisions prior to that regulatory response. Examining mortgages is important as they form the largest asset class for retail banks (Jordà et al, 2016;Arnould et al, 2020, Giasante et al, 2020. As their maturity can be up to 30 years, new mortgage lending can be exposed to transition risk from climate policy decades into the future.…”