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The effectiveness of counter-cyclical loan-to-value regulations: generic versus sector-specific rules

This paper considers the implication 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, generic and sector-specific, and compare their effectiveness in enhancing financial and macroeconomic stability. We find 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 effe3cgtiveness of the CcLTV regulation, we argue that the regulator should consider borrowers’ hetergeneity 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 just to the aggregate conditions. In this way, the regulator can directly target the specific sector or borrower type.

Working paper 785
1 July 2019
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