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Macro-prudential Tools and Credit Risk of Property Lending at Irish banks

Author

Listed:
  • Hallissey, Niamh

    (Central Bank of Ireland)

  • Kelly, Robert

    (Central Bank of Ireland)

  • O'Malley, Terry

    (Central Bank of Ireland)

Abstract

The high level of mortgage arrears in the Irish financial system and the associated overhang on economic growth underlines the importance of prudent lending standards throughout the property cycle. Macro-prudential tools such as loan-to-value (LTV) ratio caps and loan-to-income (LTI) ratio caps improve the resilience of the banking system by reducing the credit risk on new lending. Loan-level data are used to analyse the relationship between originating levels of these ratios and mortgage defaults. We find that there is a positive relationship between originating LTV and LTI ratios and subsequent defaults, with the strength of the relationship dependent on the point of the property cycle at which a loan is originated. Default rates on loans issued near the peak of the cycle to first-time buyers are particularly sensitive to LTV at origination while those issued to non first-time buyers are sensitive to both LTV and LTI at origination. In addition, there is a sharp increase in the losses on defaulted loans for loans issued above 85 per cent LTV. Although lending at higher LTI ratios has decreased signficantly, 50 per cent of new lending to owner occupiers was at LTV levels above 80 per cent in 2013.

Suggested Citation

  • Hallissey, Niamh & Kelly, Robert & O'Malley, Terry, 2014. "Macro-prudential Tools and Credit Risk of Property Lending at Irish banks," Economic Letters 10/EL/14, Central Bank of Ireland.
  • Handle: RePEc:cbi:ecolet:10/el/14
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    File URL: https://centralbank.ie/docs/default-source/publications/economic-letters/economic-letter---vol-2014-no-10.pdf?sfvrsn=10
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    References listed on IDEAS

    as
    1. McCarthy, Yvonne & McQuinn, Kieran, 2013. "Credit conditions in a boom and bust property market," Research Technical Papers 08/RT/13, Central Bank of Ireland.
    2. Kelly, Robert & O’Malley, Terence, 2016. "The good, the bad and the impaired: A credit risk model of the Irish mortgage market," Journal of Financial Stability, Elsevier, vol. 22(C), pages 1-9.
    3. Kennedy, Gerard & McIndoe-Calder, Tara, 2012. "The Irish Mortgage Market: Stylised Facts, Negative Equity and Arrears," Quarterly Bulletin Articles, Central Bank of Ireland, pages 85-108, February.
    4. Eric Wong & Andrew Tsang & Steven Kong, 2014. "How Does Loan-To-Value Policy Strengthen Banks' Resilience to Property Price Shocks - Evidence from Hong Kong," Working Papers 032014, Hong Kong Institute for Monetary Research.
    5. Reamonn Lyndon & Yvonne McCarthy, 2013. "What Lies Beneath? Understanding Recent Trends in Irish Mortgage Arrears," The Economic and Social Review, Economic and Social Studies, vol. 44(1), pages 117-150.
    6. Eric Wong & Tom Fong & Ka-fai Li & Henry Choi, 2011. "Loan-to-Value Ratio as a Macro-Prudential Tool - Hong Kong's Experience and Cross-Country Evidence," Working Papers 1101, Hong Kong Monetary Authority.
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    Cited by:

    1. Douglas Kiarelly Godoy de Araujo & João Barata Ribeiro Blanco Barroso & Rodrigo Barbone Gonzalez, 2016. "Loan-To-Value Policy and Housing Loans: effects on constrained borrowers," Working Papers Series 445, Central Bank of Brazil, Research Department.
    2. Gross, Marco & Población García, Francisco Javier, 2016. "Assessing the efficacy of borrower-based macroprudential policy using an integrated micro-macro model for European households," Working Paper Series 1881, European Central Bank.
    3. Sachverständigenrat zur Begutachtung der Gesamtwirtschaftlichen Entwicklung (ed.), 2015. "Zukunftsfähigkeit in den Mittelpunkt. Jahresgutachten 2015/16," Annual Economic Reports / Jahresgutachten, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung, volume 127, number 201516.
    4. Kelly, Robert & O'Malley, Terence & O'Toole, Conor, 2015. "Designing Macro-prudential Policy in Mortgage Lending: Do First Time Buyers Default Less?," Research Technical Papers 02/RT/15, Central Bank of Ireland.
    5. Cussen, Mary & O'Brien, Martin & Onorante, Luca & O'Reilly, Gerard, 2015. "Assessing the impact of macroprudential measures," Economic Letters 03/EL/15, Central Bank of Ireland.
    6. Douglas Kiarelly Godoy de Araujo & João Barata R B Barroso & Rodrigo Barbone Gonzalez, 2017. "Loan-to-value policy and housing finance: effects on constrained borrowers," BIS Working Papers 673, Bank for International Settlements.
    7. 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.
    8. Kelly, Robert & O'Malley, Terence, 2014. "A Transitions-Based Model of Default for Irish Mortgages," Research Technical Papers 17/RT/14, Central Bank of Ireland.
    9. International Monetary Fund, 2016. "Ireland; Financial Sector Assessment Program: Technical Note-Nonbank Sector Stability Analyses," IMF Staff Country Reports 16/317, International Monetary Fund.
    10. Kelly, Robert & Lyons, Paul & O'Toole, Conor, 2015. "Mortgage Interest Rate Types in Ireland," Economic Letters 09/EL/15, Central Bank of Ireland.
    11. Kelly, Robert & O’Malley, Terence, 2016. "The good, the bad and the impaired: A credit risk model of the Irish mortgage market," Journal of Financial Stability, Elsevier, vol. 22(C), pages 1-9.
    12. International Monetary Fund, 2016. "Ireland; Financial Sector Assessment Program: Technical Note-Macroprudential Policy Framework," IMF Staff Country Reports 16/316, International Monetary Fund.
    13. Kelly, Robert & O'Malley, Terry & O'Toole, Conor, 2014. "Do first time buyers default less? Implications for macro-prudential policy," Economic Letters 14/EL/14, Central Bank of Ireland.
    14. Keenan, Enda & Kinghan, Christina & McCarthy, Yvonne & O'Toole, Conor, 2016. "Macroprudential Measures and Irish Mortgage Lending: A Review of Recent Data," Economic Letters 03/EL/16, Central Bank of Ireland.

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