Beyond the LTV Ratio: New Macroprudential Lessons from Spain

45 Pages Posted: 9 Oct 2019

Date Written: October 8, 2019


Booming house prices have been historically correlated with the loosening of banks’ lending standards. Nonetheless, the evidence in Spain shows that the deterioration of lending policies may not be fully captured by the popular loan-to-value (LTV) ratio. Drawing on two large datasets comprising more than five million mortgage operations that cover the last financial cycle, we show that the LTV indicator may exhibit a misleading picture of actual mortgage credit imbalances and risk. In turn, risk identification improves when other metrics are considered. In particular, we show that loan-to-price (LTP) as well as ratios that consider the income of borrowers are major determinants of mortgage defaults. Moreover, we identify relevant non-linear effects of lending standards on default risk. Finally, we document that the relationship between lending standards and default rates changes over the cycle. Overall, the findings provide useful insights for the design of the macroprudential policy mix and, in particular, for the implementation of borrower-based measures.

Keywords: housing market, lending standards, defaults, macroprudential policy

JEL Classification: C25, E58, G01, G21, R30

Suggested Citation

Galán, Jorge and Lamas, Matias, Beyond the LTV Ratio: New Macroprudential Lessons from Spain (October 8, 2019). Banco de Espana Working Paper No. 1931 (2019), Available at SSRN:

Jorge Galán (Contact Author)

Banco de España ( email )

Alcala 48
Madrid 28014

Matias Lamas

Banco de España ( email )

Alcala 50
Madrid 28014

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