The Anatomy of the Transmission of Macroprudential Policies
49 Pages Posted: 4 Jun 2019
Date Written: May 15, 2019
We analyze the effect of regulatory limits on household leverage on residential mortgage credit, house prices, and banks' portfolio choice. Combining supervisory loan level and house price data, we examine the introduction of loan-to-income and loan-to-value limits on residential mortgages in Ireland. Mortgage credit is reallocated from low- to high-income borrowers and from high- to low-house price appreciation areas, cooling down, in turn, "hot" housing markets. Consistent with a bank portfolio choice channel, banks more affected by the limits drive this reallocation and increase their risk-taking in their securities holdings and corporate credit, two asset classes not targeted by the policy.
Keywords: Macroprudential Regulation, Household Leverage, Residential Mortgage Credit, House Prices
JEL Classification: G21, E21, E44, E58, R21
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