Does a Larger Menu Increase Appetite? ECB Collateral Eligibility, Mortgage Lending, and Securitization


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Abstract

This paper examines the spillover effects of unconventional monetary policy on mortgage lending in the Netherlands. We focus on a change in the European Central Bank's (ECB) collateral policy which significantly lowered the rating requirement for eligible residential mortgage-backed securities (RMBS). We find that banks affected by the policy are pricing new mortgage originations more aggressively after the policy change, at lower interest rates and with a higher probability of payment arrears. The treated banks are more likely to securitize the lower priced loans, expanding their lower-rated tranches in newly-issued RMBS. Our findings show that the policy change provides stronger incentives for banks to securitize, and feeds back into the primary market. Our results are robust to an instrumental variables approach where treatment is determined by exposures of Dutch banks to the US mortgage crisis. Placebo tests that examine alternative before/after periods and alternative treatment/control groups help us refute several alternative explanations. Overall, our findings suggest that relaxing collateral policy may distort underwriting standards in countries not explicitly targeted by the ECB. These results highlight a potential downside of having a single monetary policy objective for a diverse set of countries.