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A Close Look at Loan-To-Value Ratios: Evidence from the Japanese Real Estate Market

  • Ono, Arito
  • Uchida, Hirofumi
  • Udell, Gregory
  • Uesugi, Iichiro

Using a unique micro dataset compiled from official real estate registries in Japan, we examine the evolution of loan-to-value (LTV) ratios for business loans over the 1975 to 2009 period, the determinants of these ratios, and the ex post performance of the borrowers. We find that the LTV ratio exhibits counter-cyclicality, implying that the increase (decrease) in loan volumes is smaller than the increase (decrease) in land values during booms (busts). Most importantly, the median LTV ratios are at their lowest during the bubble period in the late 1980s and early 1990s. The counter-cyclicality of LTV ratios is robust to controlling for various characteristics of loans, borrowers, and lenders. We also find that borrowers that obtained high-LTV loans performed no worse ex-post than those with low-LTV loans, and performed better during the bubble period. These findings cast doubt on the conventional wisdom that banks adopted more lax lending standards during the bubble period, although we have other evidence in support of that story. We also draw some implications for the ongoing debate on the use of LTV ratio caps as a macroprudential policy measure.

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File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/25465/1/ifn_wp019.pdf
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Paper provided by Center for Interfirm Network, Institute of Economic Research, Hitotsubashi University in its series Working Paper Series with number 19.

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Length: 65 p.
Date of creation: Feb 2013
Date of revision:
Handle: RePEc:hit:cinwps:19
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  1. Stein, Jeremy C, 1995. "Prices and Trading Volume in the Housing Market: A Model with Down-Payment Effects," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 379-406, May.
  2. Charles A.E. Goodhart & Anil K Kashyap & Dimitrios P. Tsomocos & Alexandros P. Vardoulakis, 2012. "Financial Regulation in General Equilibrium," NBER Working Papers 17909, National Bureau of Economic Research, Inc.
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  4. Heitor Almeida & Murillo Campello & Crocker Liu, 2006. "The Financial Accelerator: Evidence from International Housing Markets," Review of Finance, European Finance Association, vol. 10(3), pages 321-352, September.
  5. Stefan Gerlach & Wensheng Peng, 2003. "Bank Lending and Property Prices in Hong Kong," Working Papers 122003, Hong Kong Institute for Monetary Research.
  6. Alexandros Vardoulakis, 2012. "Financial regulation in general equilibrium," Chapters in SUERF Studies, SUERF - The European Money and Finance Forum.
  7. Deniz Igan & Heedon Kang, 2011. "Do Loan-To-Value and Debt-To-Income Limits Work? Evidence From Korea," IMF Working Papers 11/297, International Monetary Fund.
  8. Berger, Allen N. & Udell, Gregory F., 2004. "The institutional memory hypothesis and the procyclicality of bank lending behavior," Journal of Financial Intermediation, Elsevier, vol. 13(4), pages 458-495, October.
  9. Shekhar Aiyar & Charles W. Calomiris & Tomasz Wieladek, 2012. "Does Macro-Pru Leak? Evidence from a UK Policy Experiment," NBER Working Papers 17822, National Bureau of Economic Research, Inc.
  10. Matteo Iacoviello, 2005. "House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle," American Economic Review, American Economic Association, vol. 95(3), pages 739-764, June.
  11. Berger, Allen N. & Udell, Gregory F., 2006. "A more complete conceptual framework for SME finance," Journal of Banking & Finance, Elsevier, vol. 30(11), pages 2945-2966, November.
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