The effectiveness of the counter-cyclical loan-to-value regulation: Generic versus sector-specific rules
Stellenbosch Working Paper Series No. WP21/2019Publication date: December 2019
Author(s):
[protected email address] (Department of Economics, University of Stellenbosch)
This paper considers the implications of the counter-cyclical loan-to-value (CcLTV) regulation in a setting where different types of borrowers from distinct sectors of the credit market co-exist. To identify the optimal policy design, we consider two macro-prudential policy regimes, nanely generic and sector-specific, and compare their effectiveness in enhancing financial and macroeconomic stability. The results show that both regimes are effective in this regard, especially when the economy is hit by financial and housing demand shocks. The effectiveness of both regimes is, however, shock-dependent. To enhance the effectiveness of CcLTV regulation, we argue that the regulator should consider borrowers' heterogeneity and the origin of the shocks, and tailor the CcLTV regulation according to the specific conditions of each sector of the credit market, rather than to the aggregate conditions. In this way, the regulator can directly target the specific sector or borrower type.
JEL Classification:E32, E37, E44, E51, G28
Keywords:Macro-prudential policy, Counter-cyclical LTV regulation, DSGE, Financial stability, Household credit, Corporate credit
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13 Jun 2025 Another global flashpoint ignites as Israel attacks Iran’s nuclear facilitiesThe story for the week was initially relatively positive, with the overarching narrative being that the US and China agreed on a trade truce. However, overnight, Israel struck Iran’s nuclear facilities, military sites and killed senior commanders in dozens of strikes. While Israel has attacked Iran before, this is the first time nuclear facilities were...
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