The Anatomy of the Transmission of Macroprudential Policies

Abstract

We analyze how regulatory constraints on household leverage—in the form of loan-to-income and loan-to-value limits—a?ect residential mortgage credit and house prices as well as other asset classes not directly targeted by the limits. Supervisory loan level data suggest that mortgage credit is reallocated from low-to high-income borrowers and from urban to rural counties. This reallocation weakens the feedback loop between credit and house prices and slows down house price growth in “hot” housing markets. Consistent with constrained lenders adjusting their portfolio choice, more-a?ected banks drive this reallocation and substitute their risk-taking into holdings of securities and corporate credit.

Macroprudential policy and bank systemic risk

“…Faced with policy measures restricting credit expansion for specific types of loans or to certain types of counterparties, banks may avoid the regulation by reallocating credit or increase their exposure to other asset classes that are not subject to the regulation (as also found by Cizel et al, 2016, Aiyar et al, 2014and Cerutti et al, 2017. Acharya et al (2018) document that more exposed banks shift lending to corporate lending relative to the pre-policy period and that the increase is mostly targeted towards riskier borrowers. Next to this, more exposed banks increase their holdings of risky securities compared with less affected banks.…”

Financial Spillovers and Macroprudential Policies

“…6 While the papers mentioned in the text conduct cross-country analyses, recently, there are many papers that use detailed, microeconomic data to examine the effectiveness of specific macroprudential policies in a particular country. This type of studies includes Acharya et al (2018), Auer and Ongena (2016), Barroso et al (2017), Camors et al (2019), Epure et al (2018), and Jimenez et al (2017). 7 A possible interpretation of financial instability deals with the presence of multiple equilibria associated with financial fragility.…”

Housing Consumption and Investment: Evidence from Shared Equity Mortgages

“…After the Great Recession, regulators in many countries, including the UK and the US, have implemented quantitative macro prudential tools, such as loan-and mortgage payment-to-income limits, to regulate household leverage and improve financial stability. These regulations have had an impact on household credit availability (DeFusco, Johnson, and Mondragon, 2017;Acharya, Bergant, Crosignani, Eisert, and McCann, 2018;Benetton, 2018), and have made the path to homeownership more difficult, especially for first-time buyers facing rising house prices and stagnating incomes.…”

“…The risks arise at the individual level, but often are correlated across households and have aggregate consequences, as evident during the Great Recession (Mian and Sufi, 2009;Mian, Rao, and Sufi, 2013;Corbae and Quintin, 2015;Favilukis, Ludvigson, and Van Nieuwerburgh, 2017). In response, regulators around the world have introduced or tightened macroprudential regulations on mortgages, introducing or lowering maximum loan-to-value and loan-to-income limits (DeFusco, Johnson, and Mondragon, 2017;Acharya, Bergant, Crosignani, Eisert, and McCann, 2018;Benetton, 2018).…”