The Effectiveness of Housing Collateral Tightening Policy

We propose a novel supply-side channel for the transmission of macroprudential policy. We exploit a unique policy experiment that tightens collateral requirements differentially across mortgage contract types, and document a composition change towards borrowers that have higher debt-to-income ratios and are more likely to become delinquent. This phenomenon results from the profit maximization motive of banks, which respond optimally to the excess funding liquidity, adjusting the margins that are unaffected by regulatory changes. Our results are important for the design of policy packages, and suggest that collateral tightening should be complemented with measures that target the balance sheet positions of borrowers directly.