Contractionary macroprudential policy, collateral valuation, and risk-shifting in EU banking

Michael Koetter, Felix Noth and Carl Fabian Wöbbeking

No 4/2025, IWH Discussion Papers from Halle Institute for Economic Research (IWH)

Abstract: We study real estate lending responses to tighter macroprudential policy (MPP) in the form of lower required loan-to-value (LTV) ratios. Contract details of 2.4 million mortgage loans originated between 2008 and 2020 reveal significantly fewer new loan issuances in response to contractionary MPP, commensurate with an average reduction in aggregate lending of 21 percent. Loan-level analyses reveal, however, that banks comply with lower LTVs by systematically more benevolent valuations of residential real estate pledged as collateral instead of reducing loan size. Exploiting earthquakes as plausible exogenous shocks to property values corroborates these risk-shifting patterns by banks in the form of inflated property valuations after LTV shocks.

Keywords: collateral valuation; loan-to-value caps; macroprudential policy; risk shifting (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 R31 (search for similar items in EconPapers)
Date: 2025, Revised 2025
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:iwhdps:311202

DOI: 10.18717/dp8vbg-3v09

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