LTV policy as a macroprudential tool and its effects on residential mortgage loans

Peter J. Morgan, Paulo José Regis*, Nimesh Salike

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

46 Citations (Scopus)

Abstract

Since the early 2000s, macroprudential policy has increasingly become part of the regulatory and supervisory framework. Likewise, the housing market has been at the center of the debate on systemic financial risk prevention. Among macroprudential tools, the purpose of the loan-to-value (LTV) ratio is to constrain mortgage loan creation. This paper is unique in that it analyzes the effectiveness of LTV on mortgage lending moderation using a large sample of more than 4000 banks from 46 countries. The analysis suggests mortgage loans have been successfully curbed in countries with a LTV policy. Size and non-performing loans are the two key characteristics to the effectiveness of LTV. When nonlinearities are considered, the average effect of LTV can be very large; however, it becomes much less effective with large banks and banks with bad loans. Our results suggest the inclusion of other macroprudential tools may have complementary effects to LTV, and for large size banks in particular.

Original languageEnglish
Pages (from-to)89-103
Number of pages15
JournalJournal of Financial Intermediation
Volume37
DOIs
Publication statusPublished - Jan 2019

Keywords

  • Financial stability
  • Macroprudential policy
  • Mortgage credit creation

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