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

37 Pages Posted: 25 Feb 2011

See all articles by T. C. Wong

T. C. Wong

Hong Kong Monetary Authority - Research Department

Tom Fong

Hong Kong Monetary Authority

Ka-Fai Li

Hong Kong Monetary Authority

Henry Choi

Hong Kong Monetary Authority

Date Written: February 23, 2011

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

JEL Classification: G21, G28

Suggested Citation

Wong, Tak-Chuen and Fong, Tom and Li, Ka-Fai and Choi, Henry, Loan-to-Value Ratio as a Macroprudential Tool - Hong Kong's Experience and Cross-Country Evidence (February 23, 2011). Systemic Risk, Basel III, Financial Stability and Regulation 2011. Available at SSRN: https://ssrn.com/abstract=1768546 or http://dx.doi.org/10.2139/ssrn.1768546

Tak-Chuen Wong (Contact Author)

Hong Kong Monetary Authority - Research Department ( email )

55/F, Two International Finance Centre,
8 Finance Street, Central,
Hong Kong
Hong Kong

Tom Fong

Hong Kong Monetary Authority ( email )

55/F, Two International Finance Centre, Central
Hong Kong
Hong Kong

Ka-Fai Li

Hong Kong Monetary Authority ( email )

55/F 2 IFC, 8 Finance Street
Central
Hong Kong
Hong Kong

Henry Choi

Hong Kong Monetary Authority ( email )

3 Garden Road, 30th Floor
Hong Kong
Hong Kong

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