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-affect 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-affected banks drive this reallocation and substitute their risk-taking into holdings of securities and corporate credit.

Differential Effects of Macroprudential Policy

“…The richness of our sample offers useful evidence on the validity of results spanning across countries and over time. Lastly, Araujo et al (2020) and Acharya et al (2022) offer evidence on an aggregate level (by market and borrower income group) whereas we provide evidence at the household level. The advantage of our approach is that it allows us to account for a wide range of household financial conditions and sociodemographic characteristics.…”

“…Despite its policy relevance, the literature on this topic is still in its infancy. Recent work by Acharya et al (2022) and Peydró and Rodriguez-Tous (2020) suggests that lower-income households tend to be affected more by borrower-based macroprudential policy instruments such as limits on loan-to-value (LTV) and loan-toincome (LTI) ratios. But little is known about the differential effects of other types of instruments.…”

“…Partial substitution by less-constrained lenders leads to overall credit contraction to low-income borrowers in areas that are more exposed to constrained lenders. Another example is Acharya et al (2022), who study LTV and LTI limits imposed on residential mortgage borrowers in Ireland in 2015. They similarly find a reallocation effect: mortgage loans are reallocated from low-to high-income households and from areas closer to the regulatory limits (typically urban areas) to areas further from the regulatory limits.…”

The heterogeneous impact of house purchase limits policy on housing prices: Comparison between elite and non‐elite school district houses

“…The first is macro‐prudential directives that affect mortgage interest rates. Researchers discovered that the directives, including loan‐to‐value policies and down payment ratios, impose liquidity constraints to households and force them to adjust their credit levels, thereby curbing the rise of housing prices (Armstrong et al., 2019; Laufer & Tzur‐llan, 2021; Acharya et al., 2022). The second is purchase quantity limitations that limit the number of properties an individual could purchase (Somerville et al., 2020).…”

Inefficient Regulation: Mortgages versus Total Credit

“…Regarding supply, D'Acunto and Rossi (2021) show that mortgage lending to lowincome households declined in the USA immediately following the Dodd-Frank Act in 2010. In the Irish context, Acharya et al (2022) examine how banks shift to riskier assets, such as riskier mortgages or corporate credit, in response to LTV limits on mortgages. Epure et al (2017) use Romanian mortgage data over a full credit cycle and show that tighter macro-prudential conditions are associated with a significant decline in credit.…”