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S. BASCO
Sufi (2009). The largest increase in mortgage debt was in credit riskier municipalities. Second, if we compare the change in the trend post-BNP, we can see that it was also larger in municipalities with low education. That is, during the period in which Spanish banks had plenty of funds to grant mortgages, municipalities with higher credit risk experienced a larger increase in mortgage debt. However, after the liquidity shock, it was precisely these same municipalities the ones who suffered the largest decline. It is worth mentioning again that the real economy was still growing in Spain after the BNP shock. Similar to Mian and Sufi (2009), they also obtain the same result when considering municipalities with high housing supply elasticity (no housing bubble). Therefore, given this evidence, we can conclude that the credit boom in Spain was driven by supply. Once the supply froze, the credit boom collapsed. Basco and Lopez-Rodriguez (2018) also provide evidence consistent with the view that the increase in mortgage debt was also larger among households with lower assets. To summarize, even though there still exists a debate on the origin of the mortgage debt bubble, it seems clear that credit supply played an important role in the buildup and crash of the housing bubble.
6.2 Macroprudential Regulation After the burst of the recent housing bubble, a consensus emerged on the need to have macroprudential regulation. The formal definition of macroprudential regulation (according to the IMF) is the use of prudential tools to limit systemic risk. In a nutshell, it means that it may be a good idea to control the financial sector before its vulnerabilities extend to the whole economy (systemic risk). Since it became clear that there was a feedback between house prices and debt, some of these macroprudential tools are focused on the mortgage market. One of the preferred macroprudential tools is to put a limit on the loan to value ratio (henceforth, LTV) of mortgage contracts. The idea is straightforward. If borrowers need to make a larger down payment to purchase a house, the size of the loan will be lower, which will limit housing demand and the overall debt of the economy. This policy has been encouraged by the IMF and several countries have introduced it (see, e.g., IMF 2013). Basco and Lopez-Rodriguez (2018) investigate the effect of loanto-value on the Spanish mortgage debt growth. As we discussed above, mortgage debt increased more in municipalities with low education.
