FYI

The Mortgage Bankers Association (MBA) commissioned Professor Mark J. Flannery of the University of Florida to write the study entitled, Likely Effects of Basel II Capital Standards on Competition within the 1-4 Family Residential Mortgage Industry.  The paper outlines the implications of the new standards which were designed to align banking firms' required capital with the risk of their portfolios.  The purpose of the study is to explain the underlying issues and survey the available research that has been produced to date. 

The paper identifies the following implications for Basel II standards:

- The introduction of Basel II will shift comparative advantage in financing high-quality mortgage assets toward larger, advanced internal ratings based (AIRB) firms.  It is predicted that AIRB banks will hold relatively more mortgage assets under Basel II, particularly loans with the lowest default risk. 

- For AIRB banks, the regulatory capital charges for high-quality mortgages will fall below those of the GSEs.  This should create downward pressure on the GSEs' guarantee fees.  The AIRB banks may also be able to compete with the GSEs by writing credit guarantees for loans owned by smaller, non-adopting institutions. 

- It seems likely that a bifurcated, Basel II capital standard will encourage the AIRB banks to acquire non-adoptors.  In at least some instances, a better alternative for a well-capitalized non-adoptor will be to sell itself to an AIRB bank, which can lever the target's equity capital more aggressively.  There is little evidence that capital differentials have encouraged mergers in the past, but the results could differ with a starkly bifurcated capital standard. 

Professor Mark J. Flannery is the Bank of America Eminent Scholar of Finance at the University of Florida's Warrington College of Business.  Professor  Flannery  teaches  corporate  finance  and  financial management  of  financial  institutions  in  the  graduate  program.  His  current  research  focuses  on  the  information  content  of  security  prices.  Professor  Flannery  has  served  on  the  faculty  of  the University  of  Pennsylvania  and  the  University  of  North  Carolina,  and  as  a  visiting  professor  at the London  Business  School  and  the  University  of  New  South  Wales. 

To see a copy of the study click here.  Should you have questions, please contact Aleis Stokes at (202) 557-2741 or at astokes@mortgagebankers.org

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The Mortgage Bankers Association (MBA) is the national association representing the real estate finance industry, an industry that employs more than 370,000 people in virtually every community in the country. Headquartered in Washington, D.C., the association works to ensure the continued strength of the nation's residential and commercial real estate markets; to expand homeownership and extend access to affordable housing to all Americans. MBA promotes fair and ethical lending practices and fosters professional excellence among real estate finance employees through a wide range of educational programs and a variety of publications. Its membership of over 2,400 companies includes all elements of real estate finance: mortgage companies, mortgage brokers, commercial banks, thrifts, Wall Street conduits, life insurance companies and others in the mortgage lending field. For additional information, visit MBA's Web site:  www.mortgagebankers.org.