51 Pages Posted: 15 Feb 2017 Last revised: 8 Sep 2017
Date Written: September 7, 2017
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: Suggested Citation
Agarwal, Sumit and Badarinza, Cristian and Qian, Wenlan, Credit Supply Responses to Macroprudential Policy (September 7, 2017). Available at SSRN: https://ssrn.com/abstract=2917308 or http://dx.doi.org/10.2139/ssrn.2917308