The Effectiveness of Housing Collateral Tightening Policy

46 Pages Posted: 15 Feb 2017 Last revised: 12 Apr 2018

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Cristian Badarinza

National University of Singapore (NUS)

Wenlan Qian

National University of Singapore - NUS Business School

Date Written: March 5, 2018

Abstract

We propose a novel supply-side channel for the transmission of macroprudential policy. We exploit a unique policy experiment that tightens collateral requirements differentially across mortgage contract types, and document a composition change towards borrowers that have higher debt-to-income ratios and are more likely to become delinquent. This phenomenon results from the profit maximization motive of banks, which respond optimally to the excess funding liquidity, adjusting the margins that are unaffected by regulatory changes. Our results are important for the design of policy packages, and suggest that collateral tightening should be complemented with measures that target the balance sheet positions of borrowers directly.

Keywords: credit supply, mortgage market, household finance

Suggested Citation

Agarwal, Sumit and Badarinza, Cristian and Qian, Wenlan, The Effectiveness of Housing Collateral Tightening Policy (March 5, 2018). Available at SSRN: https://ssrn.com/abstract=2917308 or http://dx.doi.org/10.2139/ssrn.2917308

Sumit Agarwal

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Cristian Badarinza (Contact Author)

National University of Singapore (NUS) ( email )

Bukit Timah Road 469 G
Singapore, 117591
Singapore

Wenlan Qian

National University of Singapore - NUS Business School ( email )

15 Kent Ridge Drive
Singapore 117592, 119245
Singapore
(65) 65163015 (Phone)

HOME PAGE: http://sites.google.com/site/wenlanqian/

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