Housing Collateral Reform and Economic Reallocation

63 Pages Posted: 28 Jul 2020

See all articles by Dimas Fazio

Dimas Fazio

National University of Singapore (NUS) - Department of Finance

Thiago Silva

Government of the Federative Republic of Brazil - Central Bank of Brazil

Date Written: May 22, 2020

Abstract

This paper examines how banks reallocate credit after the introduction of a more enforceable housing collateral contract in Brazil. This new contract greatly improved the repossession of real estate assets used as collateral for personal and business loans. We find opposing effects of this policy. Because of the stronger enforcement, credit supply increased in municipalities with higher homeownership, leading to the creation of new firms, higher employment, and economic performance. However, banks restricted credit to borrowers in low homeownership municipalities. These areas experienced a decline in entrepreneurship, local labor demand, and economic activity. The credit reallocation was greatest for credit-constrained banks, consistent with higher external financing costs. Finally, the differential effects in credit supply induced a redistribution of labor in the economy: workers migrated from low to high homeownership municipalities after the reform.

Keywords: collateral reforms, home-backed loans, bank credit spillovers, entrepreneurship, regulatory constraints

JEL Classification: G21, K22, O16

Suggested Citation

Fazio, Dimas and Silva, Thiago, Housing Collateral Reform and Economic Reallocation (May 22, 2020). Available at SSRN: https://ssrn.com/abstract=3641680 or http://dx.doi.org/10.2139/ssrn.3641680

Dimas Fazio (Contact Author)

National University of Singapore (NUS) - Department of Finance ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

Thiago Silva

Government of the Federative Republic of Brazil - Central Bank of Brazil ( email )

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distr. Federal 70074-900
Brazil

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