(Un)intended Consequences of Macroprudential Regulation

Abstract

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.