Brendan Burgess
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A very interesting speech from Ratna Sahay, Deputy Director
Monetary and Capital Markets Department, IMF
It is based on Jácome, L., and S. Mitra, forthcoming, “Implementing LTV and DSTI Ratios: Lessons from Six Country Experiences,” IMF Working Paper.
21. What indicators can signal to authorities that they should start to employ or modify these tools? The key is to combine the information from several indicators from various sources. A recent collaboration of Fund staff with six central banks—from Brazil, Korea, Hong Kong SAR, Malaysia, Poland, and Romania—dug deep into country experiences (Jácome and Mitra, forthcoming). We found creative use of micro-level data from financial institutions and credit bureaus along with macro-level indicators of household leverage, indebtedness, house prices and credit concentrations. It is especially important to look at household indebtedness, speculative activities, and qualitative indicators on financial sector risk-taking. Three trends, apart from fast credit and asset price growth, especially send an alert signal:
23. Evidence is accumulating on the effectiveness of macroprudential policies. Let’s take the case of the most popular measures: limits on LTV and DSTI. Research by Fund staff, using cross-country panels or macro-level time-series data at the country level, shows that that they are effective on average in curbing both credit growth and house price growth. We are also starting to drill down on country specific cases. Holding our magnifying glass against both macro and micro-level data gives us a more nuanced picture. In most of the six countries I mentioned earlier, the measures helped in lowering credit growth and improving loan-service performances but did not lower house price growth. Measures were less effective when foreign banks made direct cross-border loans to households through local representative offices (such as in Central and Eastern Europe) or when there was a high demand for houses from foreign buyers using cash instead of borrowing from the banking system.. Results were better when, as in Korea, the loan segment most at risk was targeted (rather than aiming at overall mortgages). Dampening house price acceleration seems to require fairly targeted measures. Examples include stamp duties, a fiscal measure, targeting the level of transactions in Hong Kong SAR and LTVs targeting speculative properties and areas in Korea.
27. To summarize, taking a cue from the IMF’s latest Global Financial Stability Report, the strategy for the use of macroprudential policies should be to: Prepare, Monitor, Act. The biggest challenge is to prepare: decide on the institutional set-up to ensure ability and willingness to act; think through the trade-offs involved with other policies and policy goals; make creative use of micro and macro data from various agencies; create indicators that have good signaling properties; gather the policy instruments (in the sense that the legal changes are made); anticipate leakages and cooperate with other domestic and foreign supervisors; and ensure that structural reforms are put in place in case of housing busts. Then actively monitor, and decide if it is time to act.
Monetary and Capital Markets Department, IMF
It is based on Jácome, L., and S. Mitra, forthcoming, “Implementing LTV and DSTI Ratios: Lessons from Six Country Experiences,” IMF Working Paper.
21. What indicators can signal to authorities that they should start to employ or modify these tools? The key is to combine the information from several indicators from various sources. A recent collaboration of Fund staff with six central banks—from Brazil, Korea, Hong Kong SAR, Malaysia, Poland, and Romania—dug deep into country experiences (Jácome and Mitra, forthcoming). We found creative use of micro-level data from financial institutions and credit bureaus along with macro-level indicators of household leverage, indebtedness, house prices and credit concentrations. It is especially important to look at household indebtedness, speculative activities, and qualitative indicators on financial sector risk-taking. Three trends, apart from fast credit and asset price growth, especially send an alert signal:
- Rapid growth in high-LTV loans with long maturities;
- Rapid growth in mortgage loans and the number of borrowers with multiple mortgages (which could signal speculative activity or circumvention of LTV or DSTI limits); and,
- Increasing non-performing loans (NPLs) on particular loan characteristics, even if the overall NPL-ratio is declining.
23. Evidence is accumulating on the effectiveness of macroprudential policies. Let’s take the case of the most popular measures: limits on LTV and DSTI. Research by Fund staff, using cross-country panels or macro-level time-series data at the country level, shows that that they are effective on average in curbing both credit growth and house price growth. We are also starting to drill down on country specific cases. Holding our magnifying glass against both macro and micro-level data gives us a more nuanced picture. In most of the six countries I mentioned earlier, the measures helped in lowering credit growth and improving loan-service performances but did not lower house price growth. Measures were less effective when foreign banks made direct cross-border loans to households through local representative offices (such as in Central and Eastern Europe) or when there was a high demand for houses from foreign buyers using cash instead of borrowing from the banking system.. Results were better when, as in Korea, the loan segment most at risk was targeted (rather than aiming at overall mortgages). Dampening house price acceleration seems to require fairly targeted measures. Examples include stamp duties, a fiscal measure, targeting the level of transactions in Hong Kong SAR and LTVs targeting speculative properties and areas in Korea.
27. To summarize, taking a cue from the IMF’s latest Global Financial Stability Report, the strategy for the use of macroprudential policies should be to: Prepare, Monitor, Act. The biggest challenge is to prepare: decide on the institutional set-up to ensure ability and willingness to act; think through the trade-offs involved with other policies and policy goals; make creative use of micro and macro data from various agencies; create indicators that have good signaling properties; gather the policy instruments (in the sense that the legal changes are made); anticipate leakages and cooperate with other domestic and foreign supervisors; and ensure that structural reforms are put in place in case of housing busts. Then actively monitor, and decide if it is time to act.