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Loan-to-value ratio limits: an exploration for Greece

Hiona Balfoussia, Harris Dellas () and Dimitris Papageorgiou ()

No 248, Working Papers from Bank of Greece

Abstract: We study the role of the loan-to-value (LTV) ratio instrument in a DSGE model with a rich set of financial frictions (Clerc et al., 2015). We find that a binding LTV ratio limit in the mortgage market leads to lower credit and default rates in that market as well as lower levels of investment and output, while leaving other sectors and agents largely unaffected. Interestingly, when the level of capital requirements is in the neighborhood of its optimal value, implementing an LTV ratio cap has a negative impact on welfare, even if it leads to greater macroeconomic stability. Furthermore, the availability of the LTV ratio instrument does not impact on the optimal level of capital requirements. It seems that once capital requirements have been optimally deployed to tame banks’ appetite for excessive risk, the use of the LTV ratio could prove counterproductive from a welfare point of view.

Keywords: Macroprudential Policy; General Equilibrium; Greece (search for similar items in EconPapers)
JEL-codes: E3 E44 G01 G21 O52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac, nep-rmg and nep-ure
Date: 2018-07
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