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.
Keywords: International, Americas, Chile, Banking, Securities, Credit Risk, LTV, Mortgage Credit Market, Loan-Loss Provisioning, Macro-Prudential Policy, BIS
Previous ArticleFED Consults on Reporting Requirements Associated with Volcker Rule
HKMA is consulting on revisions to the Supervisory Policy Manual module CR-G-14 on margin and other risk mitigation standards for non-centrally cleared over-the-counter (OTC) derivatives transactions.
PRA provided further information on the application of regulatory capital and IFRS 9 requirements to payment holidays granted or extended to address the challenges arising from COVID-19 outbreak.
HKMA announced the publication of a report on fintech adoption and innovation in the banking industry in Hong Kong.
BIS published a working paper that examines the drivers of cyber risk, especially in context of the cloud services.
ECB launched consultation on a guide specifying how the Banking Supervision expects banks to consider climate-related and environmental risks in their governance and risk management frameworks and when formulating and implementing their business strategy.
ECB published an opinion (CON/2020/16) on amendments to the prudential framework in EU in response to the COVID-19 pandemic.
EBA published a report that examines the interlinkages between recovery and resolution planning under the Bank Recovery and Resolution Directive (BRRD).
SRB published the final Minimum Requirements for Own Funds and Eligible Liabilities (MREL) policy under the Banking Package.
US Agencies (FDIC, FED, and OCC) published a final rule that makes technical changes to the March 31, 2020 interim final rule that provides a five-year transition period for the impact of the current expected credit loss (CECL) methodology on regulatory capital.
ECB published results of the March 2020 survey on credit terms and conditions in euro-denominated securities financing and over-the-counter (OTC) derivatives markets.