The real effects of borrower-based macroprudential policy: Evidence from administrative household-level data

We analyze the effects of borrower-based macroprudential policy at the household level. We exploit administrative Dutch tax and housing records in conjunction with the introduction of a mortgage loan-to-value (LTV) limit. We find that the regulation sharply reduces mortgage leverage with bunching at the LTV limit. While (regulation) affected households reduce total leverage and interest expenses, they also decrease cash balances to satisfy the LTV limit, generating an important solvency-liquidity trade-off. Nevertheless, affected households experience less financial distress after the introduction of the LTV regulation. Moreover, these households experience better liquidity management and smoother consumption following income loss. Overall, our results highlight the key financial stability and real effects of borrower-based macroprudential policy. •Mortgage reform introducing LTV limit sharply reduces household borrowing.•Household leverage and cash reserves decline generating solvency-liquidity trade-off.•Regulation reduces instances of household financial distress.•Households exhibit better liquidity and smoother consumption after income loss.