IDEAS home Printed from https://ideas.repec.org/p/bog/wpaper/248.html

Loan-to-value ratio limits: an exploration for Greece

Author

Listed:
  • Hiona Balfoussia

    (Bank of Greece)

  • Harris Dellas

    (University of Bern, CEPR)

  • Dimitris Papageorgiou

    (Bank of Greece)

Abstract

We study the role of the loan-to-value (LTV) ratio instrument in a DSGE model with a rich set of financial frictions (Clerc et al., 2015). We find that a binding LTV ratio limit in the mortgage market leads to lower credit and default rates in that market as well as lower levels of investment and output, while leaving other sectors and agents largely unaffected. Interestingly, when the level of capital requirements is in the neighborhood of its optimal value, implementing an LTV ratio cap has a negative impact on welfare, even if it leads to greater macroeconomic stability. Furthermore, the availability of the LTV ratio instrument does not impact on the optimal level of capital requirements. It seems that once capital requirements have been optimally deployed to tame banks’ appetite for excessive risk, the use of the LTV ratio could prove counterproductive from a welfare point of view.

Suggested Citation

  • Hiona Balfoussia & Harris Dellas & Dimitris Papageorgiou, 2018. "Loan-to-value ratio limits: an exploration for Greece," Working Papers 248, Bank of Greece.
    • Handle: RePEc:bog:wpaper:248
    as

    Download full text from publisher

    File URL: https://www.bankofgreece.gr/BogEkdoseis/Paper2018248.pdf
    File Function: Full Text
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393, Elsevier.
    2. Lozej, Matija & Rannenberg, Ansgar, 2017. "The macroeconomic effects of the regulatory LTV and LTI ratios in the Central Bank of Ireland's DSGE model," Economic Letters 04/EL/17, Central Bank of Ireland.
    3. Lambertini, Luisa & Mendicino, Caterina & Teresa Punzi, Maria, 2013. "Leaning against boom–bust cycles in credit and housing prices," Journal of Economic Dynamics and Control, Elsevier, vol. 37(8), pages 1500-1522.
    4. Brzoza-Brzezina, Michał & Kolasa, Marcin & Makarski, Krzysztof, 2015. "Macroprudential policy and imbalances in the euro area," Journal of International Money and Finance, Elsevier, vol. 51(C), pages 137-154.
    5. Paolo Angelini & Stefano Neri & Fabio Panetta, 2014. "The Interaction between Capital Requirements and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(6), pages 1073-1112, September.
    6. Paolo Gelain & Kevin J. Lansing & Caterina Mendicino, 2013. "House Prices, Credit Growth, and Excess Volatility: Implications for Monetary and Macroprudential Policy," International Journal of Central Banking, International Journal of Central Banking, vol. 9(2), pages 219-276, June.
    7. Alpanda, Sami & Zubairy, Sarah, 2017. "Addressing household indebtedness: Monetary, fiscal or macroprudential policy?," European Economic Review, Elsevier, vol. 92(C), pages 47-73.
    8. Laurent Clerc & Alexis Derviz & Caterina Mendicino & Stephane Moyen & Kalin Nikolov & Livio Stracca & Javier Suarez & Alexandros P. Vardoulakis, 2015. "Capital Regulation in a Macroeconomic Model with Three Layers of Default," International Journal of Central Banking, International Journal of Central Banking, vol. 11(3), pages 9-63, June.
    9. Lozej, Matija & Onorante, Luca & Rannenberg, Ansgar, 2023. "Countercyclical capital regulation in a small open economy DSGE model," Macroeconomic Dynamics, Cambridge University Press, vol. 27(5), pages 1230-1267, July.
    10. Hiona Balfoussia & Dimitris Papageorgiou, 2016. "Insights on the Greek economy from the 3D macro model," Working Papers 218, Bank of Greece.
    11. Papageorgiou, Dimitris & Vourvachaki, Evangelia, 2017. "Macroeconomic effects of structural reforms and fiscal consolidations: Trade-offs and complementarities," European Journal of Political Economy, Elsevier, vol. 48(C), pages 54-73.
    12. Funke, Michael & Paetz, Michael, 2012. "A DSGE-based assessment of nonlinear loan-to-Value policies: Evidence from Hong Kong," BOFIT Discussion Papers 11/2012, Bank of Finland Institute for Emerging Economies (BOFIT).
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Clancy, Daragh & Merola, Rossana, 2017. "Countercyclical capital rules for small open economies," Journal of Macroeconomics, Elsevier, vol. 54(PB), pages 332-351.
    2. Matthieu Darracq Paries, 2018. "Financial frictions and monetary policy conduct," Erudite Ph.D Dissertations, Erudite, number ph18-01 edited by Ferhat Mihoubi, December.
    3. Górajski, Mariusz & Kuchta, Zbigniew, 2023. "Coordination and non-coordination risks of monetary and macroprudential authorities: A robust welfare analysis," The North American Journal of Economics and Finance, Elsevier, vol. 67(C).
    4. Muñoz, Manuel A., 2020. "Macroprudential policy and the role of institutional investors in housing markets," Working Paper Series 2454, European Central Bank.
    5. Hollander, Hylton, 2017. "Macroprudential policy with convertible debt," Journal of Macroeconomics, Elsevier, vol. 54(PB), pages 285-305.
    6. Batini, Nicoletta & Melina, Giovanni & Villa, Stefania, 2019. "Fiscal buffers, private debt, and recession: The good, the bad and the ugly," Journal of Macroeconomics, Elsevier, vol. 62(C).
    7. Hylton Hollander, 2014. "The effectiveness of countercyclical capital requirements and contingent convertible capital: a dual approach to macroeconomic stability," Working Papers 19/2014, Stellenbosch University, Department of Economics.
    8. Viziniuc, Mădălin, 2021. "Winners and losers of central bank foreign exchange interventions," Economic Modelling, Elsevier, vol. 94(C), pages 748-767.
    9. Margarita Rubio & Mariarosaria Comunale, 2017. "Lithuania in the Euro Area: Monetary Transmission and Macroprudential Policies," Eastern European Economics, Taylor & Francis Journals, vol. 55(1), pages 29-49, January.
    10. Mendicino, Caterina & Punzi, Maria Teresa, 2014. "House prices, capital inflows and macroprudential policy," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 337-355.
    11. Caterina Mendicino & Kalin Nikolov & Javier Suarez & Dominik Supera, 2018. "Optimal Dynamic Capital Requirements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(6), pages 1271-1297, September.
    12. Liu, Guangling & Molise, Thabang, 2021. "The effectiveness of the counter-cyclical loan-to-value regulation: Generic versus sector-specific rules," International Review of Economics & Finance, Elsevier, vol. 72(C), pages 270-288.
    13. Mendicino, Caterina & Nikolov, Kalin & Suarez, Javier & Supera, Dominik, 2020. "Bank capital in the short and in the long run," Journal of Monetary Economics, Elsevier, vol. 115(C), pages 64-79.
    14. Guangling Liu & Thabang Molise, 2019. "The effectiveness of the counter-cyclical loan-to-value regulation: Generic versus sector-specific rules," Working Papers 21/2019, Stellenbosch University, Department of Economics.
    15. Manuel A. Muñoz, 2021. "Rethinking Capital Regulation: The Case for a Dividend Prudential Target," International Journal of Central Banking, International Journal of Central Banking, vol. 17(3), pages 271-336, September.
    16. Manuel A. Muñoz & Frank Smets, 2025. "The positive neutral countercyclical capital buffer," Bank of England working papers 1128, Bank of England.
    17. Grégory Levieuge, 2018. "La politique monétaire doit-elle être utilisée à des fins de stabilité financière ?," Revue française d'économie, Presses de Sciences-Po, vol. 0(3), pages 63-104.
    18. Ioanna Kokores, 2015. "Lean-Against-the-Wind Monetary Policy: The Post-Crisis Shift in the Literature," SPOUDAI Journal of Economics and Business, SPOUDAI Journal of Economics and Business, University of Piraeus, vol. 65(3-4), pages 66-99, july-Dece.
    19. Margarita Rubio, 2024. "Macroprudential policy implementation in a heterogeneous monetary union," Oxford Economic Papers, Oxford University Press, vol. 76(2), pages 351-374.
    20. Verona, Fabio & Martins, Manuel M.F. & Drumond, Inês, 2017. "Financial shocks, financial stability, and optimal Taylor rules," Journal of Macroeconomics, Elsevier, vol. 54(PB), pages 187-207.

    More about this item

    Keywords

    ;
    ;
    ;

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bog:wpaper:248. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Anastasios Rizos (email available below). General contact details of provider: https://edirc.repec.org/data/boggvgr.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.