Loan-to-Value Policy: Evidence from Turkish Dual Banking System

16 Pages Posted: 30 Aug 2017

See all articles by Burak Pirgaip

Burak Pirgaip

Cankaya University

Ali Hepsen

Istanbul University - Faculty of Business Administration, Department of Finance

Date Written: August 20, 2017

Abstract

As a macroprudential policy tool, loan-to-value ratio (LTV) may play an important role in reducing the threats to financial system stability. This study centers on the question of how effective the LTV regulation has been since 2011 for conventional and Islamic banks in Turkey in terms of curbing mortgage loan growth and delinquency. We first employ tests of difference in means and medians of loan and property price data in pre-LTV and post-LTV period. Secondly, we follow Chow test methodology to test for a structural break when sensitivity of mortgage loan and delinquency growth changes to property price changes considered. Two periods are statistically different as the results of both analyses reveal, while the significance level is lower for Islamic banks. Lastly, OLS regression analyses prove that, even though loan growth has become less responsive to property price increases, delinquency sensitivity to property price changes has significantly increased in the post-LTV period for conventional banks, while this is not the case for Islamic banks. Overall findings suggest that macroprudential policy framework, at least in case LTV ratio tool is used, should be set with caution in a dual banking system where conventional and Islamic banks exist together as a "one-size-fits-all" approach may not be effective enough to maintain financial stability.

Keywords: Loan-To-Value (LTV) Ratio, Macroprudential Policy, Conventional Banks, Islamic Banks, Turkey

JEL Classification: G21, G28, E44

Suggested Citation

Pirgaip, Burak and Hepsen, Ali, Loan-to-Value Policy: Evidence from Turkish Dual Banking System (August 20, 2017). Available at SSRN: https://ssrn.com/abstract=3022886 or http://dx.doi.org/10.2139/ssrn.3022886

Burak Pirgaip (Contact Author)

Cankaya University ( email )

Ankara
Turkey

Ali Hepsen

Istanbul University - Faculty of Business Administration, Department of Finance ( email )

Istanbul
Turkey

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