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How Does Loan-To-Value Policy Strengthen Banks' Resilience to Property Price Shocks - Evidence from Hong Kong

  • Eric Wong

    (Hong Kong Monetary Authority)

  • Andrew Tsang

    (Hong Kong Monetary Authority)

  • Steven Kong

    (Hong Kong Monetary Authority)

Registered author(s):

    This paper sheds light on the transmission mechanism of loan-to-value (LTV) policy to financial stability by providing three findings from Hong Kong. First, there is evidence that LTV cap tightening since 2009 has dampened both borrowers' leverage and credit growth, and that lower leverage has played a major role in strengthening banks' resilience to property price shocks. Second, the effect on loan growth is found to be state-dependent due to loan market disequilibrium, with a much stronger impact on loan supply than on demand, suggesting that calibrating this tool to curb loan growth needs an accurate estimate of both loan demand and supply. Operationally, this could pose challenges for policymakers. Finally, we find evidence of low responsiveness of housing demand to caps on LTV ratios, which is suggestive of a weak direct pass-through of LTV policy to the property market. These findings together support the view that operationally it would be optimal for LTV policy to primarily target household leverage, and that there are limitations in using this instrument to stabilise credit growth and property prices.

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    File URL: http://www.hkimr.org/uploads/publication/374/wp-no-03_2014-final-.pdf
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    Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 032014.

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    Length: 32 pages
    Date of creation: Feb 2014
    Date of revision:
    Handle: RePEc:hkm:wpaper:032014
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    1. LEUNG, K. Y. Charles & TANG, C. H. Edward, 2011. "Comparing two financial crises: the case of Hong Kong real estate markets," MPRA Paper 31562, University Library of Munich, Germany.
    2. Crowe, Christopher & Dell’Ariccia, Giovanni & Igan, Deniz & Rabanal, Pau, 2013. "How to deal with real estate booms: Lessons from country experiences," Journal of Financial Stability, Elsevier, vol. 9(3), pages 300-319.
    3. Olivier Bargain, 2009. "The Distributional Effects of Tax-benefit Policies under New Labour: A Shapley Decomposition," Working Papers 200918, Geary Institute, University College Dublin.
    4. 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.
    5. International Monetary Fund, 2011. "Macroprudential Policy; What Instruments and How to Use them? Lessons From Country Experiences," IMF Working Papers 11/238, International Monetary Fund.
    6. 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 Economies in Transition.
    7. Clauretie, Terrence M, 1973. "Interest Rates, the Business Demand for Funds, and the Residential Mortgage Market: A Sectoral Econometric Study," Journal of Finance, American Finance Association, vol. 28(5), pages 1313-26, December.
    8. Christopher L. Foote & Kristopher Gerardi & Paul S. Willen, 2008. "Negative equity and foreclosure: theory and evidence," Public Policy Discussion Paper 08-3, Federal Reserve Bank of Boston.
    9. Leung, Charles Ka Yui & CHEUNG, W. Y. Patrick & TANG, C. H. Edward, 2011. "Financial Crisis and the Comovements of Housing Sub-markets: Do relationships change after a crisis?," MPRA Paper 31627, University Library of Munich, Germany.
    10. Kent, Richard J, 1980. "Credit Rationing and the Home Mortgage Market," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(3), pages 488-501, August.
    11. Amemiya, Takeshi, 1974. "A Note on a Fair and Jaffee Model," Econometrica, Econometric Society, vol. 42(4), pages 759-62, July.
    12. Hurlin, Christophe & Kierzenkowski, Rafal, 2007. "Credit market disequilibrium in Poland: Can we find what we expect?: Non-stationarity and the short-side rule," Economic Systems, Elsevier, vol. 31(2), pages 157-183, June.
    13. Ronel Elul & Nicholas S. Souleles & Souphala Chomsisengphet & Dennis & Glennon & Robert Hunt, 2010. "What "triggers" mortgage default?," Working Papers 10-13, Federal Reserve Bank of Philadelphia.
    14. Nan-Kuang Chen & Hung-Jen Wang, 2008. "Identifying the Demand and Supply Effects of Financial Crises on Bank Credit—Evidence from Taiwan," Southern Economic Journal, Southern Economic Association, vol. 75(1), pages 26-49, July.
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