(Un)intended Consequences of Macroprudential Regulation

24 Pages Posted: 23 Feb 2021 Last revised: 23 Mar 2021

See all articles by Moran Ofir

Moran Ofir

Interdisciplinary Center (IDC) Herzliyah

Yevgeny Mugerman

Bar Ilan University

Date Written: February 18, 2021


The chapter examines the effects of several macroprudential tools on household choices in the mortgage market. In recent years, following the global financial crisis, central banks have imposed macroprudential policy tools on mortgage loans in order to protect the banking system from systemic risk associated with highly leveraged homeowners. Using a unique and detailed dataset on mortgage loans taken in Israel in the last decade, we empirically estimate the impact of these regulations on household choices and the housing market. In particular, we examine borrowers' response to the following regulatory restrictions: Loan-to-Value (LTV) limits of 75% for first time buyers, 70% for home improvers, and 50% for investors; a payment-to-income (PTI) limit of 50%; a 2/3 limit on the adjustable rate component; and a 30-year maturity limit. We found that overall, the regulatory provisions tested in this project influenced the borrowers' responses. Interestingly, two of these provisions served as an anchor to the borrowers. We obtained an increase in mortgage loans maturity following the imposed maturity limit and an increase in PTI ratio following the imposed PTI limits. We argue that these unintended consequences of the tested macroprudential regulation are a result of the anchoring and adjustment heuristic.

Keywords: Macroprudential Regulation, Unintended Consequences, Anchoring and Adjustment, Behavioral Finance

JEL Classification: D10, G21, G28, K25

Suggested Citation

Ofir, Moran and Mugerman, Yevgeny, (Un)intended Consequences of Macroprudential Regulation (February 18, 2021). Available at SSRN: https://ssrn.com/abstract=3788156 or http://dx.doi.org/10.2139/ssrn.3788156

Moran Ofir (Contact Author)

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150

Yevgeny Mugerman

Bar Ilan University ( email )

Ramat Gan

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