Long-Term Loans and Capital Requirements in Universal Banking: Sectoral Spillovers and Crowding Out Effects

Thomas Lejeune and Jolan Mohimont

No 474, Working Paper Research from National Bank of Belgium

Abstract: We extend the reference DSGE model used for policy analysis at the NBB with a financial sector, by incorporating multi-period fixed-rate corporate and mortgage loans, an imperfect pass-through from policy rates to the deposit rate, and bank capital re-quirements. Adding multi-period fixed-rate loans amplifies the propagation of default risks and strengthens the effectiveness of macroprudential policy. This amplification operates through a bank capital channel and a market timing effect that delays borrowing and investment when rates are expected to fall. The bank capital channel also propagates shocks across sectors, and amplifies the effects of monetary policy when the duration of banks’ assets is larger than that of their liabilities. With universal banks, that grant both corporate and mortgage loans, sectoral prudential policy instruments can have unintended consequences on credit supply in the untreated sector. These crowding out effects increase with the loan duration in the treated sector and decrease with the risk weight differential between the treated and untreated sectors. Finally, we apply our model to the mortgage risk weight add-on introduced by the NBB in 2013.

Keywords: Macroprudential policy; credit risks; loan maturity; financial accelerator; sectoral spillovers; unintended consequences; DSGE. (search for similar items in EconPapers)
JEL-codes: E3 E44 E5 G21 (search for similar items in EconPapers)
Pages: 62 pages
Date: 2025-04
New Economics Papers: this item is included in nep-cba, nep-dge, nep-fdg, nep-mon and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:nbb:reswpp:202504-474

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