The effectiveness of the counter-cyclical loan-to-value regulation: Generic versus sector-specific rules

Stellenbosch Working Paper Series No. WP21/2019
 
Publication date: December 2019
 
Author(s):
[protected email address] (Department of Economics, University of Stellenbosch)
[protected email address] (Department of Economics, University of Stellenbosch)
 
Abstract:

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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BER Weekly

14 Jun 2024
As has been common this year, politics and interest rates were in the spotlight this week. Locally, a government of national unity (GNU) is taking shape. The international focus was on the aftermath of the European Parliamentary election, which led French President Emmanuel Macron to call for a snap election. Across the Atlantic Ocean, market participants...

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