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One policy to rule them all? On the effectiveness of LTV, DTI and DSTI ratio limits as macroprudential policy tools

Author

Listed:
  • Nicolas Albacete

    (Oesterreichische Nationalbank, Economic Analysis Division)

  • Pirmin Fessler

    (Oesterreichische Nationalbank, Economic Analysis Division)

  • Peter Lindner

    (Economic Analysis Division)

Abstract

We employ household-level microdata to assess the effectiveness of macroprudential policy tools in identifying vulnerable households. We evaluate loan-to-value (LTV), debt-to-income (DTI) and debt service-to-income (DSTI) limits with regard to their impact on the following two potential errors: denying nonvulnerable households access to credit (type I) and not preventing vulnerable households from obtaining credit (type II). Therefore our analysis also takes into account the potential costs of falsely restricting credit access to financially sound households. Our data allow us to measure vulnerability based on current values the macroprudential tools refer to, as well as classical vulnerability measures not related to these tools. We find that policymakers’ awareness of their own goals and preferences in terms of weights of type I and II errors are crucial to effectively use the macroprudential tools at hand. Our analysis delivers qualitative results to better understand the mechanics of macroprudential policy measures as well as a tool for their evaluation in terms of costs and benefits. However, to employ our tool for actually steering policy limits, a far larger sample or register data would be necessary, as an estimation based on our relatively small survey sample is not precise enough.

Suggested Citation

  • Nicolas Albacete & Pirmin Fessler & Peter Lindner, 2018. "One policy to rule them all? On the effectiveness of LTV, DTI and DSTI ratio limits as macroprudential policy tools," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 35, pages 67-83.
    • Handle: RePEc:onb:oenbfs:y:2018:i:35:b:3
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    References listed on IDEAS

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    1. Gaston Giordana & Michael Ziegelmeyer, 2017. "Household debt burden and financial vulnerability in Luxembourg," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Data needs and Statistics compilation for macroprudential analysis, volume 46, Bank for International Settlements.
    2. Nicolas Albacete & Peter Lindner, 2017. "Simulating the impact of borrower-based macroprudential policies on mortgages and the real estate sector in Austria – evidence from the Household Finance and Consumption Survey 2014," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 33, pages 52-68.
    3. Nicolas Albacete & Peter Lindner, 2013. "Household Vulnerability in Austria – A Microeconomic Analysis Based on the Household Finance and Consumption Survey," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 25, pages 57-73.
    4. Bendel, Daniel & Demary, Markus & Voigtländer, Michael, 2016. "Eine erste Bewertung makroprudenzieller Instrumente in der Immobilienfinanzierung," IW policy papers 8/2016, Institut der deutschen Wirtschaft (IW) / German Economic Institute.
    5. Gross, Marco & Población, Javier, 2017. "Assessing the efficacy of borrower-based macroprudential policy using an integrated micro-macro model for European households," Economic Modelling, Elsevier, vol. 61(C), pages 510-528.
    6. Dimitris Christelis & Michael Ehrmann & Dimitris Georgarakos, 2015. "Exploring Differences in Household Debt Across Euro Area Countries and the United States," Staff Working Papers 15-16, Bank of Canada.
    7. Nicolas Albacete & Pirmin Fessler & Peter Lindner, 2016. "The distribution of residential property price changes across homeowners and its implications for financial stability in Austria," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 31, pages 62-81.
    8. Piotr Banbula & Arkadiusz Kotula & Joanna Gabriela Przeworska & Pawel Strzelecki, 2016. "Which households are really financially distressed: how micro data could inform the macroprudential policy," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Combining micro and macro data for financial stability analysis, volume 41, Bank for International Settlements.
    9. International Monetary Fund, 2011. "Macroprudential Policy: What Instruments and How to Use them? Lessons From Country Experiences," IMF Working Papers 2011/238, International Monetary Fund.
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    Cited by:

    1. Aleksandra Riedl, 2021. "Are CESEE borrowers at risk? COVID-19 implications in a stress test analysis," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue Q1/21, pages 37-53.
    2. Gaston Giordana & Michael Ziegelmeyer, 2024. "Using household-level data to guide borrower-based macro-prudential policy," Empirical Economics, Springer, vol. 66(2), pages 785-827, February.
    3. Nicolas Albacete & Pirmin Fessler & Maximilian Propst, 2020. "Mapping financial vulnerability in CESEE: understanding risk-bearing capacities of households is key in times of crisis," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 39, pages 71-87.
    4. Ibrahima Sangaré, 2019. "Housing sector and optimal macroprudential policy in an estimated DSGE model for Luxembourg," BCL working papers 129, Central Bank of Luxembourg.

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    More about this item

    Keywords

    macroprudential policy; financial stability; LTV; DTI; DSTI; household finance; financial vulnerability; HFCS;
    All these keywords.

    JEL classification:

    • O50 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access

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