One policy to rule them all? On the effectiveness of LTV, DTI and DSTI ratio limits as macroprudential policy tools

Nicolas Albacete, Pirmin Fessler and Peter Lindner

Financial Stability Report, 2018, issue 35, 67-83

Abstract: We employ household-level microdata to assess the effectiveness of macroprudential policy tools in identifying vulnerable households. We evaluate loan-to-value (LTV), debt-to-income (DTI) and debt service-to-income (DSTI) limits with regard to their impact on the following two potential errors: denying nonvulnerable households access to credit (type I) and not preventing vulnerable households from obtaining credit (type II). Therefore our analysis also takes into account the potential costs of falsely restricting credit access to financially sound households. Our data allow us to measure vulnerability based on current values the macroprudential tools refer to, as well as classical vulnerability measures not related to these tools. We find that policymakers’ awareness of their own goals and preferences in terms of weights of type I and II errors are crucial to effectively use the macroprudential tools at hand. Our analysis delivers qualitative results to better understand the mechanics of macroprudential policy measures as well as a tool for their evaluation in terms of costs and benefits. However, to employ our tool for actually steering policy limits, a far larger sample or register data would be necessary, as an estimation based on our relatively small survey sample is not precise enough.

Keywords: macroprudential policy; financial stability; LTV; DTI; DSTI; household finance; financial vulnerability; HFCS (search for similar items in EconPapers)
JEL-codes: C81 D12 G21 O50 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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