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Loan-to-Value Ratio as a Macro-Prudential Tool - Hong Kong's Experience and Cross-Country Evidence

Eric Wong, Tom Fong (), Ka Fai Li and Henry Choi
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Eric Wong: Research Department, Hong Kong Monetary Authority
Henry Choi: Research Department, Hong Kong Monetary Authority

No 1101, Working Papers from Hong Kong Monetary Authority

Abstract: This study assesses the effectiveness and drawbacks of maximum loan-to-value (LTV) ratios as a macroprudential tool based on Hong Kong¡¦s experience and econometric analyses of panel data from 13 economies. The tool is found to be effective in reducing systemic risk stemming from the boom-and-bust cycle of property markets. Although the tool could impose higher liquidity constraints on homebuyers, empirical evidence shows that mortgage insurance programmes (MIPs) that protect lenders from credit losses on the portion of loans over maximum LTV thresholds can mitigate this drawback without undermining the effectiveness of the tool. This finding indicates the important role of MIPs in enhancing the net benefits of LTV policy. Our estimations also show that the dampening effect of LTV policy on household leverage is more apparent than its effect on property market activities, suggesting that the policy effect may mainly manifest in impacts on household sector leverage.

Keywords: systemic risk; macroprudential policy; loan-to-value ratio; Hong Kong (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2011-02
New Economics Papers: this item is included in nep-ban, nep-reg, nep-rmg and nep-ure
References: View complete reference list from CitEc
Citations: View citations in EconPapers (85) Track citations by RSS feed

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http://www.hkma.gov.hk/media/eng/publication-and-r ... HKMAWP11_01_full.pdf (application/pdf)

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