Identifying the transmission channels of credit supply shocks to household debt: price and non-price effects

35 Pages Posted: 7 Jul 2021

Date Written: June 25, 2021

Abstract

Using matched microdata for the UK, I estimate two distinct channels via which credit supply shocks affect mortgage debt: one that operates through price conditions in credit markets; and another that operates through non-price credit conditions and affects the quantity of credit supplied by lenders. I find substantial heterogeneity in the different channels by age, financial situation, borrower type and income. Young households and home-owners respond exclusively to non-price credit conditions, in particular to changes in the supply of riskier lending. First-time buyers, middle-income households and middle-aged borrowers increase debt following shocks to either type of credit conditions. Debt responses of financially constrained borrowers are amplified by a simultaneous loosening in mortgage spreads and in credit availability at high loan to value or high loan to income ratios. In aggregate, household leverage responds more strongly to supply shocks that change the quantity of credit, as they affect households across the distribution, both at the intensive and at the extensive margin. But a loosening in price and non-price credit conditions simultaneously or a contraction in multiple price indicators at a time can also fuel rapid credit growth.

Keywords: Household finance, bank lending, credit conditions, mortgages

JEL Classification: D14, E44, G21, G51, O16

Suggested Citation

Varadi, Alexandra, Identifying the transmission channels of credit supply shocks to household debt: price and non-price effects (June 25, 2021). Bank of England Working Paper No. 927, Available at SSRN: https://ssrn.com/abstract=3879586 or http://dx.doi.org/10.2139/ssrn.3879586

Alexandra Varadi (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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