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Loan-to-Value Ratio as a Macro-Prudential Tool - Hong Kong's Experience and Cross-Country Evidence

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Author Info

  • Eric Wong

    (Research Department, Hong Kong Monetary Authority)

  • Tom Fong

    (Research Department, Hong Kong Monetary Authority)

  • Ka-fai Li

    (Research Department, Hong Kong Monetary Authority)

  • Henry Choi

    (Research Department, Hong Kong Monetary Authority)

Abstract

This study assesses the effectiveness and drawbacks of maximum loan-to-value (LTV) ratios as a macroprudential tool based on Hong Kong¡¦s experience and econometric analyses of panel data from 13 economies. The tool is found to be effective in reducing systemic risk stemming from the boom-and-bust cycle of property markets. Although the tool could impose higher liquidity constraints on homebuyers, empirical evidence shows that mortgage insurance programmes (MIPs) that protect lenders from credit losses on the portion of loans over maximum LTV thresholds can mitigate this drawback without undermining the effectiveness of the tool. This finding indicates the important role of MIPs in enhancing the net benefits of LTV policy. Our estimations also show that the dampening effect of LTV policy on household leverage is more apparent than its effect on property market activities, suggesting that the policy effect may mainly manifest in impacts on household sector leverage.

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File URL: http://www.hkma.gov.hk/media/eng/publication-and-research/research/working-papers/HKMAWP11_01_full.pdf
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Bibliographic Info

Paper provided by Hong Kong Monetary Authority in its series Working Papers with number 1101.

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Length: 26 pages
Date of creation: Feb 2011
Date of revision:
Handle: RePEc:hkg:wpaper:1101

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Related research

Keywords: systemic risk; macroprudential policy; loan-to-value ratio; Hong Kong;

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Cited by:
  1. Otaviano Canuto & Swati R. Ghosh, 2013. "Dealing with the Challenges of Macro Financial Linkages in Emerging Markets," World Bank Publications, The World Bank, number 16202, January.
  2. Funke, Michael & Paetz, Michael, 2013. "Housing prices and the business cycle: An empirical application to Hong Kong," Journal of Housing Economics, Elsevier, vol. 22(1), pages 62-76.
  3. Tillmann, Peter, 2013. "Capital inflows and asset prices: Evidence from emerging Asia," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 717-729.

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