Institute for Economic and Social Research

The Strategic Response of Banks to Macroprudential Policies: Evidence from Mortgage Stress Tests in Canada

2021-06-03

The Strategic Response of Banks to Macroprudential Policies: Evidence from Mortgage Stress Tests in Canada

Review of Finance

Robert Clark, Shaoteng Li 


Abstract

Following the crisis, macroprudential regulations targeting mortgage-market vulnerabilities were widely adopted, their success often depending on intermediaries' responses. We show that Canadian banks behaved strategically to limit the potency of recently implemented mortgage stress tests, requiring borrower qualification based on the mode of 5-year rates posted by the Big 6 banks rather than transaction rates. The government aimed to cool credit markets, but since many mortgages are government-insured, Big 6 interests were not aligned. Using DiD comparing changes in 5-year spreads with 3-year spreads, unaffected by the policy, we find rates were lowered encouraging continued borrowing, muting the tests' impact.

Keywords: 

macroprudential regulation;
credit supply;
 
mortgage market;
 
mortgage stress tests;
 
rate-benchmark manipulation


back

Copyright © 2019 Institute for Economic and Social Research ICP record No.: Yue ICP Bei No. 12087612