Can regulation on loan-loss-provisions for credit risk affect the mortgage market? Evidence from administrative data in Chile

Summary

Focus

How is mortgage credit affected by macroprudential regulation? We look at how a change in regulation affecting loan loss provisions for mortgage credit risk affected the Chilean mortgage credit market.

Contribution

A growing body of literature has established that macroprudential policies subdue fast growth of mortgage credit and house prices. Most of those analyses have relied on cross-country data, but cross-country average effects are not enough for individual countries to take a decision on implementation, which can be costly. Evaluating macroprudential tools based on evidence from micro data complements the cross-country approach. We help fill this gap in the literature.

Findings

We consider the change in the required loan loss provisions for credit risk, which were implemented in the Chilean mortgage market in January 2016. First, we glean a number of lessons to guide our empirical analysis from a stylised model of imperfect information. Second, by using detailed administrative tax records on the census of all real estate transactions in Chile between 2012 and 2017, we find that the change in regulation did have an effect on newly granted loans: they were smaller as a fraction of pledged collateral. Finally, using our stylised model we find an implicit loan-to-value limit at the 80% threshold. This prediction is supported robustly by the evidence in the data.

Abstract

We argue that financial institutions responded by raising their acceptable borrowing standards on borrowers, enhancing the quality of their portfolio, but also contracting their supply of mortgage credit. We reach this conclusion by developing a stylized imperfect information model which we use to guide our empirical analysis. We conclude that the loan-to-value (LTV) ratio was 2.8% lower for the mean borrower, and 9.8% lower for the median borrower, because of the regulation. Our paper contributes to the literature on the evaluation of macro-prudential policies, which has mainly exploited cross-country evidence. In turn, our analysis narrows down to one particular policy in the mortgage market, and dissects its effects by exploiting unique administrative tax data on the census of all real estate transactions in Chilean territory, in the period 2012-2016.

JEL classification: G21, R31

Keywords: loan loss provisions, LTV, screening, coarsened exact matching, macroprudential policy