Cross-border macroprudential policy spillovers and bank risk-taking

We test whether there was a change in risk-taking by Irish banks in the U.K. mortgage market following the introduction of macroprudential limits on loan-to-value (LTV) and loan-toincome (LTI) ratios in Ireland in early 2015. Using confidential loan-level data on lending in the Irish and U.K. mortgage markets, we provide evidence of risk spillovers whereby Irish banks increased their LTV and LTI ratios on lending abroad in response to the regulatory macroprudential tightening at home. We find heterogeneous effects across groups of borrowers, with LTVs and LTIs increasing most for first-time homebuyers (FTBs). We estimate that, relative to a control group of local lenders, the probability of a high-risk loan being issued by an Irish bank in the U.K. mortgage market increased by 16 percent overall, and by 28 percent in the FTB segment, after the policy introduction.