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

Eric Wong, Andrew Tsang and Steven Kong
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Eric Wong: Hong Kong Monetary Authority
Steven Kong: Hong Kong Monetary Authority

No 32014, Working Papers from Hong Kong Institute for Monetary Research

Abstract: 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.

Keywords: Banking; Disequilibrium; Hong Kong; Loan-To-Value; Macroprudential Policy (search for similar items in EconPapers)
JEL-codes: E58 G21 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2014-02
New Economics Papers: this item is included in nep-ban, nep-mac and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

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