Comments on “Loan-to-value Caps, Bank Lending and Spill-over to General Purpose Loans” Ashley Dunstan Macro-financial Department, RBNZ December 2017

Growing use of macro-prudential policies Cumulative usage of macro-prudential instruments

Motivation: unintended side effects from LVR regulation? Primary objective to improve borrower and bank resilience not well studied Resilience benefit could be undermined if : Borrowers use unsecured credit to maintain LVR at previous level Banks substitute to higher risk lending Other financial institutions grow to undertake high-LVR loans Use detailed micro data to assess the extent of these leakages following introduction of LVRs in Turkey

Key results in paper Compared to other banks, banks that were more exposed to LTV introduction: reduced housing increased non-housing consumer lending to residential customers increased corporate lending, especially in riskier buckets Compared to other borrowers, those with LTV just below constraint: tend to have higher non-housing borrowing just prior to purchase had larger increases in both housing and non-housing borrowing after LTV easing

How general is the result? Shadow price of unsecured vs mortgage credit looks particularly low in Turkey Turkey NZ % of bank lending 10 60 % of household debt 38 95 Typical mortgage term 7.5 25 Typical mortgage rate 10+ ~5 Spread to unsecured 4-6 10-15

Pile-up of mortage lending below LVR caps in New Zealand Distribution of new lending by LVR

With significant effect on downturn default and loss rates Estimated loss and default rates during stress scenario

Implications for macro-prudential policy design Risk of spill-overs and leakages need to be actively factored into policy design and monitoring frameworks: Case for basing policy on total debt rather than mortgages only, eg total debt service to income Need tools to monitor leakages and gauge overall impact of policies on resilience Framework should allow flexibility to remove or adapt tools if leakages/efficiency costs grow too large Bank capital levels need to be strong as a backstop (could require leaning against falling risk weights)

Summary This is a novel and policy relevant contribution to the literature on effectiveness of LVRs Results highlight statistically significant spill-overs and leakages in Turkey More analysis of net impact of LVRs on riskier borrowers would be useful Look forward to seeing more studies applying the same approach to different settings