DP14959 The Anatomy of the Transmission of Macroprudential Policies

Author(s): Viral V. Acharya, Katharina Bergant, Matteo Crosignani, Tim Eisert, Fergal McCann
Publication Date: June 2020
Keyword(s): House Prices, household leverage, macroprudential regulation, Residential Mortgage Credit
JEL(s): E21, E44, E58, G21, R21
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14959

We analyze how regulatory constraints on household leverage-in the form of loan-to-income and loan-to-value limits-affect residential mortgage credit and house prices as well as other asset classes not directly targeted by the limits. Supervisory loan level data suggest that mortgage credit is reallocated from low-to high-income borrowers and from urban to rural counties. This reallocation weakens the feedback loop between credit and house prices and slows down house price growth in "hot" housing markets. Consistent with constrained lenders adjusting their portfolio choice, more-affected banks drive this reallocation and substitute their risk-taking into holdings of securities and corporate credit.