Lending Pro-Cyclicality and Macro-Prudential Policy: Evidence from Japanese LTV Ratios

69 Pages Posted: 10 May 2013

See all articles by Arito Ono

Arito Ono

Chuo University

Hirofumi Uchida

Kobe University - Graduate School of Business Administration

Gregory F. Udell

Indiana University - Kelley School of Business - Department of Finance

Iichiro Uesugi

Hitotsubashi University

Multiple version iconThere are 2 versions of this paper

Date Written: May 8, 2013

Abstract

Using a unique micro dataset compiled from official real estate registries in Japan, we examine the evolution of loan-to-value (LTV) ratios for business loans over the 1975 to 2009 period, the determinants of these ratios, and the ex post performance of the borrowers. We find that the LTV ratio exhibits counter-cyclicality, implying that the increase (decrease) in loan volumes is smaller than the increase (decrease) in land values during booms (busts). Most importantly, the median LTV ratios are at their lowest during the bubble period in the late 1980s and early 1990s. The counter-cyclicality of LTV ratios is robust to controlling for various characteristics of loans, borrowers, and lenders. We also find that borrowers that obtained high-LTV loans performed no worse ex-post than those with low-LTV loans, and performed better during the bubble period. These findings cast doubt on the conventional wisdom that banks adopted more lax lending standards during the bubble period, although we have other evidence in support of that story. We also draw some implications for the ongoing debate on the use of LTV ratio caps as a macro-prudential policy measure.

Keywords: loan-to-value (LTV) ratios, pro-cyclicality, macro-prudential policy, bubble

JEL Classification: G28, R33, G21, G32

Suggested Citation

Ono, Arito and Uchida, Hirofumi and Udell, Gregory F. and Uesugi, Iichiro, Lending Pro-Cyclicality and Macro-Prudential Policy: Evidence from Japanese LTV Ratios (May 8, 2013). Available at SSRN: https://ssrn.com/abstract=2262575 or http://dx.doi.org/10.2139/ssrn.2262575

Arito Ono

Chuo University ( email )

2nd floor Blg 4 Tampa Campus
742-1 Higashinakano, Hachioji
Tokyo 192-03
Japan

HOME PAGE: http://https://sites.google.com/site/aritoono/Home

Hirofumi Uchida (Contact Author)

Kobe University - Graduate School of Business Administration ( email )

2-1, Rokkodai-cho, Nada-ku
Kobe, 657-8501
Japan
81-78-803-6949 (Phone)

HOME PAGE: http://www.b.kobe-u.ac.jp/~uchida

Gregory F. Udell

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

Iichiro Uesugi

Hitotsubashi University ( email )

2-1 Naka Kunitachi-shi
Tokyo 186-8306
Japan
+81-42-580-8348 (Phone)

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