Beyond the LTV ratio: new macroprudential lessons from Spain

Jorge Galan and Matías Lamas

No 1931, Working Papers from Banco de España

Abstract: Booming house prices have been historically correlated with the loosening of banks’ lending standards. Nonetheless, the evidence in Spain shows that the deterioration of lending policies may not be fully captured by the popular loan-to-value (LTV) ratio. Drawing on two large datasets comprising more than five million mortgage operations that cover the last financial cycle, we show that the LTV indicator may exhibit a misleading picture of actual mortgage credit imbalances and risk. In turn, risk identification improves when other metrics are considered. In particular, we show that loan-to-price (LTP) as well as ratios that consider the income of borrowers are major determinants of mortgage defaults. Moreover, we identify relevant non-linear effects of lending standards on default risk. Finally, we document that the relationship between lending standards and default rates changes over the cycle. Overall, the findings provide useful insights for the design of the macroprudential policy mix and, in particular, for the implementation of borrower-based measures.

Keywords: housing market; lending standards; defaults; macroprudential policy (search for similar items in EconPapers)
JEL-codes: C25 E58 G01 G21 R30 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2019-10
New Economics Papers: this item is included in nep-ban, nep-mac, nep-rmg and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:1931

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