Loan-to-Value Caps, Bank Lending, and Spillover to General-Purpose Loans

Loan-to-Value Caps, Bank Lending, and Spillover to General-Purpose Loans

21/23

English

August 2021

This paper studies the effect of the introduction of and a subsequent easing in residential credit loan-to-value (LTV) ratio caps on bank lending and borrowers' loan usage with a unique and comprehensive bank-linked individual credit data set in a large emerging economy. We first show that following the introduction of an LTV cap, banks that were previously lending at rates above the limit have reduced residential lending, as targeted by the policy. We find that banks change their balance sheet composition as a response, replacing the reduction in residential lending with higher commercial loans and general-purpose loans issued to new residential borrowers.

 Next we document that following the easing in the LTV ratio cap, previously constrained residential borrowers tend to take out more general-purpose credit compared to unconstrained residential borrowers, exhibiting a form of "credit spillover". This finding suggests that individuals may be purchasing more expensive/better quality homes than they otherwise could have, implying a "flight to quality" in the residential market in line with the easing in the LTV cap. These outcomes of changes in a widely used macroprudential policy suggests that LTV policies alone are successful in impacting the credit cycle and house price movements but may not necessarily impact overall indebtedness.

Loan to value ratio, Credit risk, Housing loans, General-purpose loans, Credit spillover

G21; G28; E51; E58; G20