Mortgage lending, monetary policy, and prudential measures in small euro‐area economies: Evidence from Ireland and the Netherlands

• Author: Jakob Haan,David‐Jan Jansen,Peter McQuade,Anna Samarina,Mary Everett
• Date: 01 February 2021
• Published date: 01 February 2021
• DOI: http://doi.org/10.1111/roie.12506

Rev. Int. Econ. 2021;29:117–143. wileyonlinelibrary.com/journal/roie

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© 2020 John Wiley & Sons Ltd

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INTRODUCTION

The global financial crisis of 2007/2008 had a deep impact on both monetary and macroprudential

policies world-wide. In response to the macroeconomic fall-out of the crisis, central banks quickly

lowered the short-term interest rates, sometimes to levels below zero. In some countries additional

policy steps, such as asset purchase programs, were deemed necessary (Blinder et al.,2017). Measures

of macroprudential policy had already been in place before the crisis, but in the wake of the crisis

these instruments have been used much more widely and frequently in advanced countries in order

Received: 30 November 2019

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Revised: 15 July 2020

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Accepted: 4 September 2020

DOI: 10.1111/roie.12506

SPECIAL ISSUE PAPER

Mortgage lending, monetary policy, and prudential

measures in small euro-area economies: Evidence

from Ireland and the Netherlands

MaryEverett1

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Jakobde Haan2,3,4

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David-JanJansen2

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PeterMcQuade1

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AnnaSamarina2,3

1Economics and Statistics Directorate,

Central Bank of Ireland, Dublin, Ireland

2Research Department, De Nederlandsche

Bank, Amsterdam, The Netherlands

3Faculty of Economics and Business,

University of Groningen, Groningen, The

Netherlands

4CESifo Munich, Munich, Germany

Correspondence

Mary Everett, Central Bank of Ireland,

Dublin, Ireland.

Email: mary.everett@centralbank.ie

Abstract

This paper examines whether the increased use of macropru-

dential policies since the global financial crisis has affected

the impact of (euro-area and foreign) monetary policy on

mortgage lending in Ireland and the Netherlands, which are

both small open economies in the euro area. Using quar-

terly bank-level data on domestic lending in both countries

for 2003–2018, we find that restrictive euro-area monetary

policy shocks reduce the growth of mortgage lending. We

find evidence that stricter domestic prudential regulation

mitigates this effect in Ireland, but not so in the Netherlands.

There is some weak evidence for an international bank lend-

ing channel that can be mitigated by stricter lender-based

domestic prudential regulation.

JEL CLASSIFICATION

E42; F36; G21

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EVERETT ET al.

to prevent a build-up of financial vulnerabilities and to increase the financial system's resilience to

shocks. The range of prudential policies is wide and includes instruments such as quantitative restric-

tions on borrowers, capital requirements, or limits on financial institutions' balance sheets (Cerutti

et al.,2017).

In a setting where both monetary and prudential policies are used actively and simultaneously,

the possible interaction between both policies comes to the forefront (Beyer et al., 2017; Collard

et al.,2017). As pointed out by Beau et al. (2014), an important reason for the possible interaction

of monetary and macroprudential policies is that the latter will (partly) work through the very same

transmission channels as monetary policy, the most likely being the bank lending and the balance

sheet channels. Furthermore, monetary policy affects the financial conditions but could also increase

the future financial vulnerabilities, especially if it remains accommodative for an extended period

(Adrian & Liang,2018).

It is also important to recognize that business cycles, which are the focus of monetary policy, and

credit cycles, on which prudential policies are based, are not necessarily synchronized, such that the

two policies' frameworks could potentially conflict at times (Repullo & Suarez, 2013). Angelini et al.

(2014) argue that, in “normal” times this could lead to suboptimal results in the absence of cooper-

ation between the respective competent authorities. They also suggest, however, that there is a high

degree of complementarity between monetary and macroprudential policies if financial shocks, rather

than real economic shocks, are dominant.

The existing literature offers contradictory findings and, to date, empirical papers studying how

prudential policies interact with the transmission of monetary policy are scarce. On the one hand,

there are a number of papers indicating that tighter regulations should reduce the effectiveness of

monetary policy by providing an additional constraint on the behavior of banks.1 On the other hand,

there is also an emerging body of research that suggests that the opposite is the case. Financial sectors

that are better regulated will tend to be healthier ex ante, providing better conditions to facilitate the

pass-through of accommodative monetary policy during an economic cyclical downswing or crisis

(Dell’Ariccia et al.,2017; Maddaloni & Peydro, 2013). Some recent papers provide evidence that

monetary and prudential policies may work in the same direction. For the case of the United Kingdom,

De Marco and Wieladek (2015) find that monetary policy and capital requirements reinforce each

other when tightened, but only for small banks; and Forbes et al. (2017) find evidence indicating that

monetary policies can amplify the effects of regulatory policy. However, for the case of Belgium, De

Jonghe et al. (2020) report that there is a trade-off between prudential capital requirements and mone-

tary policy as their results suggest that a balance sheet expansion of the European Central Bank (ECB)

has a weaker impact on credit supply for banks with higher capital requirements.

With the aim of extending the empirical evidence on the interaction between monetary and pru-

dential policies, this paper investigates how monetary policy shocks affect growth in mortgage lending

in Ireland and the Netherlands and how this effect depends on the domestic prudential policy stance.2

Ireland and the Netherlands represent particularly interesting cases for the study of the interaction

between prudential policy and monetary policy. First, they are relatively small members of a large

monetary union, namely the euro area (EA). Consequently, the monetary policy stance of the EA as a

whole is not necessarily in line with that of domestic business and financial cycles. Second, housing

markets showed strong volatility in both countries recently. Ireland experienced a credit boom and a

housing bubble against a background of negligible regulatory response, which was succeeded by one

of the costliest banking crisis in recent times from an economic and fiscal perspective (Beck,2014;

Laeven & Valencia,2010). The housing market in the Netherlands also experienced a boom-bust

cycle in the period under consideration. During the crisis, house prices showed a strong decline, but