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

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

3. 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

4. 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

5. 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

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

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

8. 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)

9. 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