Identifying the transmission channels of credit supply shocks to household debt: price and non-price effects

Alexandra Varadi ()
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Alexandra Varadi: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 927, Bank of England working papers from Bank of England

Abstract: Using matched microdata for the UK, I estimate two distinct channels via which credit supply shocks affect mortgage debt: one that operates through price conditions in credit markets; and another that operates through non-price credit conditions and affects the quantity of credit supplied by lenders. I find substantial heterogeneity in the different channels by age, financial situation, borrower type and income. Young households and home-owners respond exclusively to non-price credit conditions, in particular to changes in the supply of riskier lending. First-time buyers, middle-income households and middle-aged borrowers increase debt following shocks to either type of credit conditions. Debt responses of financially constrained borrowers are amplified by a simultaneous loosening in mortgage spreads and in credit availability at high loan to value or high loan to income ratios. In aggregate, household leverage responds more strongly to supply shocks that change the quantity of credit, as they affect households across the distribution, both at the intensive and at the extensive margin. But a loosening in price and non-price credit conditions simultaneously or a contraction in multiple price indicators at a time can also fuel rapid credit growth.

Keywords: Household finance; bank lending; credit conditions; mortgages (search for similar items in EconPapers)
JEL-codes: D14 E44 G21 G51 O16 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2021-06-25
New Economics Papers: this item is included in nep-ban, nep-mac and nep-ure
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