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Loan-to-Value Ratio as a Macro-Prudential Tool - Hong Kong's Experience and Cross-Country Evidence

Author

Listed:
  • Eric Wong

    (Research Department, Hong Kong Monetary Authority)

  • Tom Fong

    (Research Department, Hong Kong Monetary Authority)

  • Ka-fai Li

    (Research Department, Hong Kong Monetary Authority)

  • Henry Choi

    (Research Department, Hong Kong Monetary Authority)

Abstract

This study assesses the effectiveness and drawbacks of maximum loan-to-value (LTV) ratios as a macroprudential tool based on Hong Kong¡¦s experience and econometric analyses of panel data from 13 economies. The tool is found to be effective in reducing systemic risk stemming from the boom-and-bust cycle of property markets. Although the tool could impose higher liquidity constraints on homebuyers, empirical evidence shows that mortgage insurance programmes (MIPs) that protect lenders from credit losses on the portion of loans over maximum LTV thresholds can mitigate this drawback without undermining the effectiveness of the tool. This finding indicates the important role of MIPs in enhancing the net benefits of LTV policy. Our estimations also show that the dampening effect of LTV policy on household leverage is more apparent than its effect on property market activities, suggesting that the policy effect may mainly manifest in impacts on household sector leverage.

Suggested Citation

  • 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.
  • Handle: RePEc:hkg:wpaper:1101
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    File URL: http://www.hkma.gov.hk/media/eng/publication-and-research/research/working-papers/HKMAWP11_01_full.pdf
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    Cited by:

    1. Funke, Michael & Paetz, Michael, 2013. "Housing prices and the business cycle: An empirical application to Hong Kong," Journal of Housing Economics, Elsevier, vol. 22(1), pages 62-76.
    2. Tillmann, Peter, 2013. "Capital inflows and asset prices: Evidence from emerging Asia," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 717-729.
    3. 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.
    4. Sebastiaan Pool, 2018. "Mortgage debt and shadow banks," DNB Working Papers 588, Netherlands Central Bank, Research Department.
    5. Kuttner, Kenneth N. & Shim, Ilhyock, 2016. "Can non-interest rate policies stabilize housing markets? Evidence from a panel of 57 economies," Journal of Financial Stability, Elsevier, vol. 26(C), pages 31-44.
    6. Otaviano Canuto & Swati R. Ghosh, 2013. "Dealing with the Challenges of Macro Financial Linkages in Emerging Markets," World Bank Publications, The World Bank, number 16202, November.
    7. Hallissey, Niamh, 2015. "Mortgage insurance in an Irish context," Economic Letters 05/EL/15, Central Bank of Ireland.
    8. Gabriele Galati & Richhild Moessner, 2018. "What Do We Know About the Effects of Macroprudential Policy?," Economica, London School of Economics and Political Science, vol. 85(340), pages 735-770, October.
    9. repec:eee:finsta:v:29:y:2017:i:c:p:92-105 is not listed on IDEAS
    10. repec:clh:resear:v:8:y:2015:i:34 is not listed on IDEAS

    More about this item

    Keywords

    systemic risk; macroprudential policy; loan-to-value ratio; Hong Kong;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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