10 October 2011

ECON Committee released a study: 'Responsible lending – Barriers to Competition'

Market structure

The study starts with a description of the supply side of the mortgage market and defines residential mortgages as “loans for the purchase of a private property which can be secured or not secured on the residential property”, hence the focus on residential mortgages for households. It classifies mortgage lenders (MLs) according to two dimensions: the main business of the lender and its nationality (domestic vs foreign institutions). As for their main business, MLs can be divided into credit institutions and other mortgage lenders (OMLs). The latter include i.a. building societies and governmental mortgage suppliers. The  penetration of OMLs varies across the countries, and their role has been significantly reduced by the recent financial crisis, since OMLs cannot rely on deposits to finance mortgages but on financial markets, which have shrunk because of the crisis. Penetration of foreign lenders is still a very limited phenomenon, especially for the old Member States and for large countries.

The main channels of distribution of mortgages in Europe are

1. the direct channel which is represented by mortgage sales through branches, telephone and the internet (the latter two are also referred to as “remote channels”), and
2. the indirect channel of distribution which is represented by the sales through intermediaries. The development of the indirect channel varies across countries, being particularly relevant in the UK, Ireland and the Netherlands.

In terms of countries’ mortgage indebtedness, the study provides data on the ratio of mortgage debt over GDP. When ranking countries according to this relative measure, it can be observed that on average mortgage debt weights 50 per cent of GDP for EU-25, although there is great variability across Member States, ranging from more than 100 per cent in The Netherlands to less than 20 per cent in Eastern Europe Member States. In terms of dynamics, the relative measure of market size has been steadily expanding overtime from 1998 to 2009 at EU-27 level (with a slight decline after the financial crisis in 2008).

The study then looks at two potential proxies of the intensity of competition in European mortgage markets, namely supply side concentration and profitability. Using 2004 data, it observes that, on average at the EU level, the five largest mortgage lenders had an aggregated market share above 75 per cent, although there was variation across countries. In Germany, Spain, Austria and Italy, the degree of concentration is below the average EU value, whereas in the Nordic countries and in most Eastern Europe Member States the degree of concentration is above the average value. Overall, the emerging picture is thus that of a fairly concentrated market. More recent data, together with data on banking, suggests that concentration has increased in the last few years, following the financial crisis. The study also finds evidence of an increase in the spreads between mortgage loans and deposit rates in the most recent years.

Full report

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