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

Author

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

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.

Suggested Citation

  • Morgan, Peter J. & Regis, Paulo José & Salike, Nimesh, 2019. "LTV policy as a macroprudential tool and its effects on residential mortgage loans," Journal of Financial Intermediation, Elsevier, vol. 37(C), pages 89-103.
    • Handle: RePEc:eee:jfinin:v:37:y:2019:i:c:p:89-103
    DOI: 10.1016/j.jfi.2018.10.001
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    References listed on IDEAS

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    More about this item

    Keywords

    Macroprudential policy; Financial stability; Mortgage credit creation;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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