We study whether and how EU banks comply with tighter macroprudential policy (MPP). Observing contractual details for more than one million securitized loans, we document an elusive risk-shifting response by EU banks in reaction to tighter loan-to-value (LTV) restrictions between 2009 and 2022. Our staggered difference-in-differences reveals that banks respond to these MPP measures at the portfolio level by issuing new loans after LTV shocks that are smaller, have shorter maturities, and show a higher collateral valuation while holding constant interest rates. Instead of contracting aggregate lending as intended by tighter MPP, banks increase the number and total volume of newly issued loans. Importantly, new loans finance especially properties in less liquid markets identified by a new European Real Estate Index (EREI), which we interpret as a novel, elusive form of risk-shifting.

We examine whether liquidity dynamics within banking groups matter for the transmission of macroprudential policy. Using matched bank headquarters-branch data for identification, we find a lending channel of reserve requirements for municipal branches whose headquarters are more exposed to the policy tool. The result is driven by the 2008–2009 crisis and is stronger for state-owned branches, especially when being less profitable and liquidity constrained. These findings suggest the presence of cross-regional distributional effects of macroprudential policies operating via internal capital markets.