Unregulated Lending, Mortgage Regulations and Monetary Policy

Policy-makers have supported the resilience of the housing market by adopting rules to encourage prudent lending practices by mortgage lenders. These measures are often aimed at the traditional banking sector, while non-depository financial institutions or shadow banks have limited or no prudential regulations. Could this shift credit intermediation toward unregulated lenders?

This paper evaluates the effectiveness of macroprudential policies when regulations are uneven across mortgage lender types. We look at credit tightening that results from macroprudential regulations and examine how much of it is counteracted by credit shifting to unregulated lenders. We also study the impact of monetary policy tightening when some lenders are unregulated.

Our results show that the presence of unregulated lenders weakens the impact of the policies on house prices, household debt and output. We also find that leakage to unregulated lenders increases when monetary policy is tightened.