LOAN-TO-VALUE RATIO LIMITS:
AN EXPLORATION FOR GREECE
Hiona Balfoussia
Bank of Greece
Harris Dellas
University of Bern, CEPR
Dimitris Papageorgiou
Bank of Greece
Abstract
We study the role of the loan-to-value (LTV) ratio instrument in a DSGE model with a rich set of financial frictions (Clerc et al., 2015). We find that a binding LTV ratio limit in the mortgage market leads to lower credit and default rates in that market as well as lower levels of investment and output, while leaving other sectors and agents largely unaffected. Interestingly, when the level of capital requirements is in the neighborhood of its optimal value, implementing an LTV ratio cap has a negative impact on welfare, even if it leads to greater macroeconomic stability. Furthermore, the availability of the LTV ratio instrument does not impact on the optimal level of capital requirements. It seems that once capital requirements have been optimally deployed to tame banks’ appetite for excessive risk, the use of the LTV ratio could prove counterproductive from a welfare point of view.
Keywords: Macroprudential Policy, General Equilibrium, Greece.
JEL classification: E3, E44, G01, G21, O52.
Acknowledgements: This research was conducted when Harris Dellas was visiting Bank of Greece on the Bank’s programme of cooperation with universities. We would like to thank Heather Gibson and Alexandros Vardoulakis for constructive comments and suggestions. The views expressed in this paper are those of the authors and not necessarily those of the Bank of Greece, the ECB or the Eurosystem.
Correspondence:
Hiona Balfoussia
Bank of Greece
Economic Analysis and Research Department
21, E. Venizelos Avenue,
Athens 102 50, Greece,
Tel. +30 210 3202429
Email: HBalfoussia@bankofgreece.gr