April 18, 2019

BIS published a working paper on the impact of macro-prudential regulation on mortgage credit. The paper focuses on how a change in regulation related to loan-loss provisions for mortgage credit risk affected the Chilean mortgage credit market.

The Chilean banking supervisor, in January 2016, raised required loan-loss provisions for mitigation of mortgage credit risk. The paper attempts to address the questions related to the effect of the change in regulation by using a two-step analysis. First, the paper presents an analysis the features of the regulation using an off-the-shelve screening-under-imperfect-information model, adapting the model to the problem at hand. The second step in the analysis is empirical. A unique administrative dataset from the Chilean Internal Revenue Service (Servicio de Impuestos Internos, or SII) has been used; the dataset includes records of all nation-wide real estate transactions from 2002 onward. In this dataset, transactional variables, such as the property price, down-payments, and the financial institution, involved in the mortgage loan were observed.

The key findings of the study are as follows:

  • The new regulation had an effect on loan-to-value (LTV) ratios for new loans: fewer loans with lower LTV ratios were granted. It has been estimated that, because of the regulation, the LTV ratio is 2.8% lower on average. Furthermore, the median borrower is granted 9.8% lower LTV.
  • The paper highlights that, because of the way the regulation differentiates provisioning below and above 80% of LTV ratio, a large fraction of loans are granted at exactly that LTV. In particular, the fraction of loans granted at 80% LTV more than tripled and represented one fourth of all loans in 2016-17. This agglomeration effect is predicted by the stylized model.
  • The model has also been used to rationalize the reason why higher financial costs were not off-loaded onto costumers via higher mortgage rates. Such outcome is an equilibrium outcome stemming from the combination of imperfect information and competition between banks.

 

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Keywords: International, Americas, Chile, Banking, Securities, Credit Risk, LTV, Mortgage Credit Market, Loan-Loss Provisioning, Macro-Prudential Policy, BIS

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