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Do LTV and DSTI caps make banks more resilient?

Listed author(s):
  • M. Dietsch
  • C. Welter-Nicol

This study provides responses to the question of the effectiveness of Loan-To-Value (LTV) and Debt Service-To-Income (DSTI) caps to contribute to financial stability. Using a lender’s risk management perspective, the paper provides a new methodology extending the standard asymptotic single risk factor to a multifactor framework, the additional factors being linked to LTV or DSTI tranches. On the basis of a unique database containing 850 896 individual housing loans, the results demonstrate the efficiency of credit standards which constrain the households’ indebtedness. On average, credit risk tends to grow in line with the increase of LTV and DSTI tranches. But our findings show also that the relationship between the risk’s growth and the ratios’ growth is not monotonic. Portfolio credit risk culminates in tranches close to the 100% LTV and the 35% DSTI thresholds. This has implications for the calibration of LTV and DSTI caps in a macroprudential perspective.

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File URL: http://acpr.banque-france.fr/fileadmin/user_upload/acp/publications/Debats_economiques_et_financiers/201406-Do-LTV-and-DSTI-caps-make-banks-more-resilient.pdf
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Paper provided by Banque de France in its series Débats économiques et financiers with number 13.

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Length: 50 pages
Date of creation: 2014
Handle: RePEc:bfr:decfin:13
Contact details of provider: Postal:
Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS

Web page: http://www.banque-france.fr/

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