The Impact of LTV Regulations on Systemic Risk

Countries around the world have used a variety of policy measures to deal with house price and
mortgage credit booms. Caps on Loan to Property Values (or LTVs) are the most frequently used tool to
address procyclical real estate and mortgage credit provision. LTV limits should be adjusted over the
financial cycle (with a tightening of policies occurring during housing booms and a relaxation during
downturns). LTV limits on mortgages may not only enhance the resilience of banks and households, but
may also restrict the tendency of banks to loosen credit norms in a boom. In many countries, a
combination of instruments (including a cap on LTVs) may be most effective.
Choose a country (but not Canada, Hong Kong, South Korea, France or Norway) that has adjusted its LTV
caps in recent years in order to mitigate housing market or housing finance risk.
 Describe the stated objectives of policymakers
 Describe the evolution of LTV caps and other macroprudential tools over time
 Describe the impact on housing prices, credit, and household leverage with the introduction of
these tools
 Analyse whether the actions were effective
 Evaluate the benefits, costs, risks of these policy actions
Required Background Readings (3):
Financial Stability Review, Banque de France, April 2014
http://www.banque-france.fr/uploads/tx_bdfgrandesdates/FSR-2014-18-integral.pdf
 “The effects of macroprudential policies on housing market risks: evidence from Hong Kong”
Pages 105-120
 “Macroprudential policies in Korea: Key measures and experiences” Pages 121-130
 “The housing market: the impact of macroprudential measures in France” Pages 195-206
2
Your paper should include the following subsections (Note: Maximum Total Grade = 100%):
1. Introduction: Describe changes in housing market policies in your chosen country (10%)
2. Background: Describe the reasons policymakers cited or suggested for introducing changes in
policy (10%)
3. Descriptive Statistics: Document housing prices, credit, household leverage, etc. dynamics prior
to and after changes in LTVs and other introduced policies (10%)
4. Literature review: Describe how and why these policies may or may not work. What are the realfinancial linkages? You must provide references to economic theory! (20%)
5. Empirical Evidence: Determine the effectiveness of these policies. I would like to see some
correlation or regression analysis. (20%)
6. Policy Risks: What are the potential costs and risks (i.e., unintended consequences) of these
policy actions? Provide a short literature review. (10%)
7. Appendices: Use graphs, charts, tables to illustrate and present description statistics and
empirical evidence. Refer to them in the main text (10%)
 Sources of data should be indicated at the bottom of each graph, chart, and table
8. Abstract (self-contained 100 word summary at the beginning of your paper), Conclusion, and List
of References (10%)
Organisation, Structure, Length and Format:
 The total length of the paper should be between 20 and 25 pages
 The main text (not including cover page, references, footnotes, appendices) must be between
3000 and 4000 words
o Include footnotes as required
 You should cite journal articles to support your analysis
o EconLit (http://library2.utm.utoronto.ca/economics) for references to economic theory
o Central bank research and webpages
 Data: Central banks, national statistical agencies, IMF, BIS, OECD, etc. A cover page should
include the title of your paper, your name and student number, course title and number, and
the instructor’s name
 Figures, tables, calculations and other quantitative material should be included as appendices,
but should be cited or summarized in the main body of the text
 A list of references must be included at the end of your paper
o You must provide appropriate information about all external sources of information
used, including websites
 Mandatory Formatting: 1-inch margins; double-spaced; Use ‘Times New Roman’; 12 font
 Your paper should be free of spelling and grammatical errors, clear and well written
Make sure at least 2 people have read your draft and provided feedback before submitting your paper
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