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Loan-To-Value Ratio as a MacroPrudential Tool –
Hong Kong experiences
Eric T C Wong and Cho-hoi Hui
comments by
John Hassler
Purpose, method and results
• Purpose: to examine and quantify how LTV lending restrictions
affect the sensitivity of mortgage delinquency rates to changes in
house prices and GDP.
• Method: panel regression of change in quarterly delinquency
rates in 13 countries on changes in property prices and GDP.
Control for mortgage/gdp and interest rate.
• Finding: In the four countries with LTV-regulation (HK,MAL,
SING, KOR) delinquency rates respond (significantly?) less to
changes in prices and GDP.
Comments - results
• Many things affect the sensitivity and level of delinquency rates.
Tremendeous variation in sample. Thailand 100 times higher
volatility of delinquency than Canada.
• Recourse rules and personal bankruptcy regulation may be very
important. Theory and at least casual observations from the U.S.
and Sweden suggest these rules are very important.
• Authors need to demonstrate that differences in such regulations
are not behind the results. Seems possible that existence of LTV
rules are correlated with other institutional features that are
relevant.
• Could perhaps use variation over time – but non-linear
relationships and time-lags make cause problems.
Should we expect it to work?
• Does really LTV regulation, reduce risk exposure of banks?
• Probably yes..
• ...but with strict rules against default like in Sweden, key for
delinquency rates is the ability of households to repay. Only
indirectly related to house price movements.
• LTV ratio one variable determining risk in mortgages. But
certainly not the only one, and in Sweden probably not the key
one. Investigation of Swedish Financial Supervisory Authority
gives no indication of careless lending, at least from a stability
point of view.
• Banks seem to behave well – don’t change the incentives!
• Mortgage risk is no big deal anyway.
What's the purpose?
• To evaluate a policy, a clear purpose must be defined.
• In this paper, the main reason for LTV regulation is to reduce risk
exposure of banks.
• Current Swedish regulation not motivated by this, at least not
according to FI – rather consumer protection.
• But then, is LTV the key variable to focus on? Value at risk
relative to some measure of expected future stream of income and
its risk would be a better target.
• From a consumer protection perspective, perhaps banks should be
required to take more risk.
• Careless lending should perhaps be treated as reckless financial
advice and lead to banks having to pay compensations.
Bubbles?
• Another potential motive is to control credit growth in order to
curb speculation and bubbles?
•
Better tools likely to exist
– monetary policy,
– mortgage taxes,
– property taxes,
– deduction ceilings.