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The strategic response of banks to macroprudential policies: Evidence from mortgage stress tests in Canada

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  • Robert Clark

    (Queen's University)

  • 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.

Suggested Citation

  • Robert Clark & Shaoteng Li, 2020. "The strategic response of banks to macroprudential policies: Evidence from mortgage stress tests in Canada," Working Paper 1445, Economics Department, Queen's University.
    • Handle: RePEc:qed:wpaper:1445
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    File URL: https://www.econ.queensu.ca/sites/econ.queensu.ca/files/wpaper/qed_wp_1445.pdf
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    References listed on IDEAS

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    Cited by:

    1. Present, Thomas & Simoens, Mathieu & Vander Vennet, Rudi, 2023. "European bank margins at the zero lower bound," Journal of International Money and Finance, Elsevier, vol. 131(C).

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    More about this item

    Keywords

    macroprudential regulation; credit supply; mortgage market; mortgage stress tests; rate-benchmark manipulation;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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