Mortgage Debt and Shadow Banks

57 Pages Posted: 13 Mar 2018

See all articles by Sebastiaan Pool

Sebastiaan Pool

De Nederlandsche Bank - Research Department

Date Written: March 8, 2018


Since the 1980s, the global banking sector has been characterized by three trends: i) a secular decline in interest rates, ii) a reallocation of bank investments from corporate loans towards mortgages and iii) the rise of shadow banking relative to regulated banking. This paper builds a general equilibrium framework that connects, analyzes and explains these trends in a causal way. In the model, exogenous downward pressure on real interest rates increases the share of mortgage investments. Consequently, the interbank market for mortgage securities becomes more liquid. This increases funding liquidity and shadow banks gain comparative advantage over regulated banks with respect to the supply of mortgage loans. In relative terms, the shadow banking sector grows. Meanwhile, the economy becomes more vulnerable to financial crises as shadow banks issue too many uninsured deposits. To enhance financial stability, I consider restrictions on admissible loan-to-value ratios for mortgage loans to reduce house price and mortgage supply fluctuation. Finally, I suggest to introduce interest-paying central bank deposits for households to raise the costs for banks to finance themselves with uninsured deposits.

Keywords: Shadow Banking, Regulated Banking, Financial Stability

JEL Classification: E44, G10, G21, G23

Suggested Citation

Pool, Sebastiaan, Mortgage Debt and Shadow Banks (March 8, 2018). De Nederlandsche Bank Working Paper No. 588. Available at SSRN: or

Sebastiaan Pool (Contact Author)

De Nederlandsche Bank - Research Department ( email )

P.O. Box 98
1000 AB Amsterdam

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