How Does Loan-to-Value Policy Strengthen Banks’ Resilience to Property Price Shocks – Evidence from Hong Kong

HKIMR Working Paper No. 03/2014

32 Pages Posted: 20 Feb 2014

See all articles by T. C. Wong

T. C. Wong

Hong Kong Monetary Authority - Research Department

Andrew Tsang

Hong Kong Monetary Authority

Steven Kong

Hong Kong Monetary Authority

Date Written: February 17, 2014

Abstract

This paper sheds light on the transmission mechanism of loan-to-value (LTV) policy to financial stability by providing three findings from Hong Kong. First, there is evidence that LTV cap tightening since 2009 has dampened both borrowers’ leverage and credit growth, and that lower leverage has played a major role in strengthening banks’ resilience to property price shocks. Second, the effect on loan growth is found to be state-dependent due to loan market disequilibrium, with a much stronger impact on loan supply than on demand, suggesting that calibrating this tool to curb loan growth needs an accurate estimate of both loan demand and supply. Operationally, this could pose challenges for policymakers. Finally, we find evidence of low responsiveness of housing demand to caps on LTV ratios, which is suggestive of a weak direct pass-through of LTV policy to the property market. These findings together support the view that operationally it would be optimal for LTV policy to primarily target household leverage, and that there are limitations in using this instrument to stabilise credit growth and property prices.

Keywords: Banking, Disequilibrium, Hong Kong, Loan-To-Value, Macroprudential Policy

JEL Classification: E58, G21

Suggested Citation

Wong, Tak-Chuen and Tsang, Andrew and Kong, Steven, How Does Loan-to-Value Policy Strengthen Banks’ Resilience to Property Price Shocks – Evidence from Hong Kong (February 17, 2014). HKIMR Working Paper No. 03/2014. Available at SSRN: https://ssrn.com/abstract=2396965 or http://dx.doi.org/10.2139/ssrn.2396965

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

Andrew Tsang

Hong Kong Monetary Authority ( email )

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

Steven Kong

Hong Kong Monetary Authority ( email )

3 Garden Road, 30th Floor
Hong Kong
Hong Kong

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