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

Guangling Liu () and Thabang Molise ()
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Guangling Liu: Department of Economics, University of Stellenbosch
Thabang Molise: Department of Economics, University of Stellenbosch

No 21/2019, Working Papers from Stellenbosch University, Department of Economics

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.

Keywords: Macro-prudential policy; Counter-cyclical LTV regulation; DSGE; Financial stability; Household credit; Corporate credit (search for similar items in EconPapers)
JEL-codes: E32 E37 E44 E51 G28 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-cba and nep-mac
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