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(Un)intended Consequences of Macroprudential Regulation

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Law and Economics of Regulation

Part of the book series: Economic Analysis of Law in European Legal Scholarship ((EALELS,volume 11))

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.

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Notes

  1. 1.

    Galati and Moessner (2012) and Claessens (2015).

  2. 2.

    Mugerman et al. (2018) propose a dynamic model of bank actions in the shadow of LTV ratio regulation.

  3. 3.

    Krznar and Morsink (2014) and Lim et al. (2011).

  4. 4.

    International Monetary Fund (2011).

  5. 5.

    For another example of testing the borrowers’ decision-making in a different loan market—peer-to-peer lending—see Ayal et al. (2018).

  6. 6.

    International Monetary Fund (2014).

  7. 7.

    The micro data included in the report are based on a survey of households’ plans for housing tenure and expected housing prices.

  8. 8.

    Tzur-Ilan (2017).

  9. 9.

    Campbell (2006).

  10. 10.

    Brunnermeier and Jullliard (2008).

  11. 11.

    Paiella and Pozzolo (2007).

  12. 12.

    Agarwal et al. (2012).

  13. 13.

    Agarwal et al. (2014).

  14. 14.

    Mugerman et al. (2016).

  15. 15.

    Tversky and Kahneman (1974).

  16. 16.

    Tversky and Kahneman (1974), p. 1128.

  17. 17.

    See Plous (1989), Chapman and Johnson (1999), Epley and Gilovich (2001), Mussweiler and Englich (2005), McElroy and Dowd (2007); and more recently Hurwitz et al. (2018); see Furnham and Boo (2011).

  18. 18.

    See Ariely et al. (2003), Englich et al. (2005), Critcher and Gilovich (2008); and more recently Mugerman et al. (2016).

  19. 19.

    Van Exel et al. (2006).

  20. 20.

    Hastie et al. (1999), Marti and Wissler (2000), Englich et al. (2005).

  21. 21.

    Strack and Mussweiler (1997).

  22. 22.

    Eckstein et al. (2011).

  23. 23.

    Crowe et al. (2011).

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Author information

Authors and Affiliations

  1. Interdisciplinary Center (IDC) Herzliya, Herzliya, Israel

    Moran Ofir

  2. Bar-Ilan University, Ramat Gan, Israel

    Yevgeny Mugerman

Authors
  1. Moran Ofir
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  2. Yevgeny Mugerman
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Correspondence to Moran Ofir .

Editor information

Editors and Affiliations

  1. Faculty of Law, University of Lucerne, Lucerne, Switzerland

    Klaus Mathis

  2. School of Law, University of Notre Dame, Notre Dame, IN, USA

    Avishalom Tor

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Ofir, M., Mugerman, Y. (2021). (Un)intended Consequences of Macroprudential Regulation. In: Mathis, K., Tor, A. (eds) Law and Economics of Regulation. Economic Analysis of Law in European Legal Scholarship, vol 11. Springer, Cham. https://doi.org/10.1007/978-3-030-70530-5_9

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  • DOI: https://doi.org/10.1007/978-3-030-70530-5_9

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