Do LTV and DSTI caps make banks more resilient?

Michel Dietsch and C. Welter-Nicol

Debats Economiques et financiers from Banque de France

Abstract: This study provides responses to the question of the effectiveness of Loan-To-Value (LTV) and Debt Service-To-Income (DSTI) caps to contribute to financial stability. Using a lender’s risk management perspective, the paper provides a new methodology extending the standard asymptotic single risk factor to a multifactor framework, the additional factors being linked to LTV or DSTI tranches. On the basis of a unique database containing 850 896 individual housing loans, the results demonstrate the efficiency of credit standards which constrain the households’ indebtedness. On average, credit risk tends to grow in line with the increase of LTV and DSTI tranches. But our findings show also that the relationship between the risk’s growth and the ratios’ growth is not monotonic. Portfolio credit risk culminates in tranches close to the 100% LTV and the 35% DSTI thresholds. This has implications for the calibration of LTV and DSTI caps in a macroprudential perspective.

Keywords: thousing finance; Loan-to-Value; Debt service to Income; credit risk; economic capital. (search for similar items in EconPapers)
JEL-codes: G21 G32 R31 R38 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2014
New Economics Papers: this item is included in nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

Downloads: (external link)
http://acpr.banque-france.fr/fileadmin/user_upload ... s-more-resilient.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bfr:decfin:13

Access Statistics for this paper

More papers in Debats Economiques et financiers from Banque de France Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS. Contact information at EDIRC.
Bibliographic data for series maintained by Michael brassart ().