Heterogeneity and Asymmetric Macroeconomic Effects of Changes in Loan-to-Value Limits (original) (raw)
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International Review of Economics & Finance, 2021
This paper considers the implications of the counter-cyclical loan-to-value (CcLTV) regulation in a setting where different types of borrowers from distinct sectors of the credit market co-exist. To identify the optimal policy design, we consider two macro-prudential policy regimes, nanely generic and sector-specific, and compare their effectiveness in enhancing financial and macroeconomic stability. The results show that both regimes are effective in this regard, especially when the economy is hit by financial and housing demand shocks. The effectiveness of both regimes is, however, shock-dependent. To enhance the effectiveness of CcLTV regulation, we argue that the regulator should consider borrowers' heterogeneity and the origin of the shocks, and tailor the CcLTV regulation according to the specific conditions of each sector of the credit market, rather than to the aggregate conditions. In this way, the regulator can directly target the specific sector or borrower type.
Credit Allocation and Monetary shocks in a Model with Heterogeneous Lenders
The paper presents a model of endogenous credit allocation with heterogeneous lenders. We consider three classes of agents' -firms, individual investors and banks. Banks differ according to their level of capital and monitoring technology. In a setting of moral hazard with limited liability, we stress that firms' ability to obtain external funds is conjointly determined by their own wealth, bank capital, and monitoring technology. We show that small (medium) firms invest with the small (large) bank and pay a high (low) interest rate whereas large firms are financed by the financial market. Moreover, we stress that restrictive monetary policy leads to a contraction in aggregate investment and to a credit reallocation mechanism, between the two banks and the market, similar to a "flight to quality" effect. This restrictive policy has a strong effect not on bank-dependent firms but on small bank-dependent firms.
Inflation volatility effects on the allocation of bank loans
Journal of Financial Stability, 2016
This paper examines the distortionary effects of inflation volatility on the allocation of bank loans. We argue that inflation volatility would render bank managers to behave more conservatively in issuing new loans. In contrast, when inflation volatility is low, bank managers would have the latitude to lend more idiosyncratically. Using a large panel of commercial bank data gathered from 15 countries, we provide support for our hypothesis by demonstrating a strong negative relation between inflation volatility and the dispersion of loans-to-assets ratio. Similar results are obtained when we split the sample between EU and non-EU country groups. The robustness of our findings is confirmed by a battery of sensitivity checks.
Changes in bank lending standards and the macroeconomy
Journal of Monetary Economics, 2014
Identifying macroeconomic effects of credit shocks is difficult because many of the same factors that influence the supply of loans also affect the demand for credit. Using bank-level responses to the Federal Reserve's Loan Officer Opinion Survey, we construct a new credit supply indicator: changes in lending standards, adjusted for the macroeconomic and bank-specific factors that also affect loan demand. Tightening shocks to this credit supply indicator lead to a substantial decline in output and the capacity of businesses and households to borrow from banks, as well as to a widening of credit spreads and an easing of monetary policy.
Macroprudential and Monetary Policy Loan: loan-level evidence from reserve requirements
We analyze the impact of reserve requirements on the supply of credit to the real sector. For identification, we exploit a tightening of reserve requirements in Uruguay during a global capital inflows boom, where the change affected more foreign liabilities, in conjunction with its credit register that follows all bank loans granted to non-financial firms. Following a difference-in-differences approach, we compare lending to the same firm before and after the policy change among banks differently affected by the policy. The results show that the tightening of the reserve requirements for banks lead to a reduction of the supply of credit to firms. Importantly, the stronger quantitative results are for the tightening of reserve requirements to bank liabilities stemming from non-residents. Moreover, more affected banks increase their exposure into riskier firms, and larger banks mitigate the tightening effects. Finally, the firm-level analysis reveals that the cut in credit supply in the loan-level analysis is binding for firms. The results have implications for global monetary and financial stability policies.
Do Loan-to-Value and Debt-to-Income Limits Work? Evidence from Korea
SSRN Electronic Journal, 2000
With another real estate boom-bust cycle bringing woes to the financial sector and economic activity, a quest to design a better policy toolkit to deal with these booms and busts has begun. Macroprudential measures are often advocated as part of such a toolkit and recently have been adopted in a number of countries. Yet, we know very little about the impact of activelyimposed maximum limits on loan-to-value and debt-to-income ratios. This paper takes a step to fill this gap by analyzing the Korean experience with these tools. Using regional data from 2002 to 2010 and survey information on households from 2001 to 2009, we find that such limits are associated with a decline in house price appreciation rates and reduced transaction activity. Furthermore, there is evidence that the limits alter expectations, which play a key role in bubble dynamics. The association with mortgage loan originations and household leverage, however, appears to be weaker, perhaps reflecting the slow-changing nature of balance sheets. JEL Classification Numbers: G21, G28, R20
University of Chicago (Dissertation), 1984
The existence of non-price rationing is, more or less, a fact of life. Anyone who has experienced the refusal of a loan (or college admission) application has known that the willingness to pay the price (or even one higher) may have little to do with the receiving of a good. The problem of "persistent", as opposed to temporary, non-price rationing has received relatively little study by economists. The inability to reconcile the persistence of this phenomenon with "optimal" pricing behavior has made it a heretofore ignored subject. Starting with Hodgman (1960, 1962), Miller (1962), Freimer and Gordon (1965), and continuing with Jaffee and Modigliani (1969), Jaffee and Russell (1976), Keeton (1979), and Stiglitz and Weiss (1981, 1983), there has been a somewhat unsystematic attempt to study the rationing phenomenon in credit markets as a reaction to risky investment by borrowers. The present paper examines these theories and outlines a more general theoretical model to explain the incentives behind non-price rationing of the sort found in credit markets. Unlike recent models (Stiglitz, 1981), rationing is shown to be pareto optimal. It is also shown, explicitly, how various regulations may impinge on lender and borrower behavior in these circumstances. The paper is divided into two chapters. The first chapter provides background on earlier credit rationing theories and then briefly outlines the present theory and some of its implications. This theory explains why non-price rationing may be superior to price rationing along with an explicit treatment of how government regulation will affect behavior in these circumstances. Chapter II presents an empirical analysis based upon the propositions outlined in Chapter 1. It is shown that the reaction to regulatory change by consumer credit lenders is consistent with the theory.
Digging Deeper--Evidence on the Effects of Macroprudential Policies from a New Database
IMF Working Papers
This paper introduces a new comprehensive database of macroprudential policies, which combines information from various sources and covers 134 countries from January 1990 to December 2016. Using these data, we first confirm that loan-targeted instruments have a significant impact on household credit, and a milder, dampening effect on consumption. Next, we exploit novel numerical information on loan-to-value (LTV) limits using a propensityscore-based method to address endogeneity concerns. The results point to economically significant and nonlinear effects, with a declining impact for larger tightening measures. Moreover, the initial LTV level appears to matter; when LTV limits are already tight, the effects of additional tightening on credit is dampened while those on consumption are strengthened.
The Shift in Bank Credit Allocation: New Data and New Findings
SSRN Electronic Journal, 2017
In this paper we present a new data set on bank credit in four categories: home mortgages, consumer credit, bank loans to non-bank financials, and loans to nonfinancial business, for 74 economies over 1990-2013. We offer a full description of sources and methods of data collection and construction and comparisons with adjacent data sets. We document key trends including the shift in bank credit allocation away from traditional business lending. The literature suggests substantial consequences of this 'debt shift' for growth, income distribution and macroeconomic resilience, which motivated this data construction. A second contribution is to analyze drivers of debt shift in fixed-effects and system-GMM regressions for the full sample and separately for advanced and emerging economies. We find that debt shift is larger in advanced economies with a stronger presence of foreign banks and higher trade. Financial deregulation strongly correlates with debt shift.
The interest rate pass-through by loan size: Evidence for Mexico, 2011-2019
Deleted Journal, 2023
This paper measures the impact of changes in the central bank's reference rate on bank lending rates at both the aggregate level and by loan size. Our data come from the payroll and personal loan markets in Mexico for the period comprising 2011 to 2019. We use an autoregressive model with distributed lags, which allows for the possibility of asymmetric effects. The results show, among other findings, that the pass-through is small; it is not necessarily positive; asymmetric behaviour cannot be ruled out; and, its value depends on the loan size. These results imply that the effectiveness of monetary policy is weakened, in addition to the fact that the reaction of banks to changes in the target interest rate may have distributional implications. The originality of the paper lies in the grouping of interest rates by loan size and the use of a methodology that allows us to assess the existence of asymmetries. Its main shortcoming is the lack of data regarding the characteristics of the borrowers.