Loan-to-Value Caps, Bank Lending, and Spill-over to General-Purpose - PowerPoint PPT Presentation

Loan-to-Value Caps, Bank Lending, and Spill-over to General-Purpose Loans Selva Bahar Baziki & Tanju C ¸apacıo˘ glu Central Bank of the Republic of Turkey Macro Financial Analysis Division Housing, Household Debt and Policy Reserve Bank of New Zealand December 12, 2017 Wellington, New Zealand The views and opinions expressed are those of the author and do not necessarily reflect those of the Central Bank of the Republic of Turkey or its employees. Baziki & C ¸apacıo˘ glu (CBRT) LTV Caps and Additional Loans 1 / 52

A rise in General-Purpose Loan Usage for Residential Borrowers After the LTV cap increases from 75% to 80% at the end of September 2016, we observe a rise in the median and total GP borrowing for new home owners. Figure 1: Median general-purpose loans (thousand TL) by residential borrowers. What explains this increase after the policy easing ? Baziki & C ¸apacıo˘ glu (CBRT) LTV Caps and Additional Loans 2 / 52

Questions What is the impact of the introduction of restrictive LTV caps on bank lending behavior? ◮ Introducing a cap of 75% (2011) should affect banks’ lending and risk optimization. ◮ ”Unmet lending appetite” redistributed among other retail? Commercial? ◮ ”Unmet risk appetite” triggers riskier lending behavior? What is the impact of an easing change in LTV caps on non-residential borrowing by constrained home owners? ◮ Increasing the cap from 75% to 80% (2016) should affect borrowers’ optimization ◮ Lower the additional borrowing? Baziki & C ¸apacıo˘ glu (CBRT) LTV Caps and Additional Loans 3 / 52

Timeframe LTV cap introduced in 2011 at 75%, and increased to 80% in 2016m9. 80% Co nstra ine d Bo r. E xpo se d Unc o nstra ine d Bo r. 75% Co nstra ine d Bo rro we rs Une xpo se d Unc o nstra ine d Bo rro we rs 2011m1 2016m9 Figure 2: Timeframe of the analysis Baziki & C ¸apacıo˘ glu (CBRT) LTV Caps and Additional Loans 4 / 52

Contributions ◮ Use credit register data and appraisal reports ◮ Universal coverage on housing loans at the individual-loan level ◮ In a large emerging economy ◮ Policy changes were exogenous shocks ◮ Bank Assets and Risk Preferences: Contrast exposed and non-exposed banks in terms of retail, commercial lending and risk preferences. ◮ Residential Borrowers’ Additional Loan Use: Contrast non-residential borrowing of LTV cap constrained borrowers before and after the policy change ◮ Isolating demand and supply side effects Baziki & C ¸apacıo˘ glu (CBRT) LTV Caps and Additional Loans 5 / 52

Analysis on Exposed/Unexposed Banks How has the balance sheet changed? 80% E xpo se d Sa me L o c a tio n : Re ta il L e nding • Sa me F irm : Co mme rc ia l L e nding • 75% Une xpo se d 2011m1 2016m9 Figure 3: Retail and Commercial Lending Baziki & C ¸apacıo˘ glu (CBRT) LTV Caps and Additional Loans 6 / 52

Analysis on Exposed/Unexposed Banks How has other lending to residential borrowers changed? 80% E xpo se d 75% Co nstra ine d Bo rro we rs Une xpo se d Unc o nstra ine d Bo rro we rs 2011m1 2016m9 Figure 4: General Purpose Loan Issuance Baziki & C ¸apacıo˘ glu (CBRT) LTV Caps and Additional Loans 7 / 52

Preview of Results - Lending and Risk Taking Introduction : High exposure banks ◮ Reduce residential loan amounts, ◮ Increase GPloans... ◮ ...and they do so for new residential borrowers ”unmet lending/risk appetite” ◮ Increase commercial loans... ◮ ...esp for riskier firms ”unmet risk appetite” Expansion : Banks with average LTV closer to 75% ◮ Increase residential and GPloans esp for residential borrowers ”credit spill-over” ◮ They have lower commercial loan outcomes than banks farther away from the limit but the effect is for a short period Baziki & C ¸apacıo˘ glu (CBRT) LTV Caps and Additional Loans 8 / 52

Analysis on Constrained/Unconstrained Residential Borrowers How has the additional demand of residential borrowers changed? 80% Co nstra ine d Bo r. Unc o nstra ine d Bo rro we rs 75% Co nstra ine d Bo rro we rs Unc o nstra ine d Bo rro we rs 2011m1 2016m9 Figure 5: Additional leverage??? Baziki & C ¸apacıo˘ glu (CBRT) LTV Caps and Additional Loans 9 / 52

Preview of Results - Easing Higher LTV cap increases access to residential borrowing - should lower the need for additional funds But we see that average and total GP borrowing has increased after the easing policy LTV cap constrained buyers are taking out more non-residential loans than unconstrained : ”credit spillover”. LTV cap constrained buyers after the change are taking out more non-residential loans than before : ”flight to quality”? Baziki & C ¸apacıo˘ glu (CBRT) LTV Caps and Additional Loans 10 / 52

Mechanism Demand Side Factors Introduction of a cap makes some buyers credit constrained. Some buyers are discouraged from entering the housing market altogether. Others will enter purchase contracts: ◮ Will need additional funds to cover expenses associated with a new home. ◮ These purchases usually occur after the home purchase. ◮ May still need additional funds to cover the cost of the required downpayment. ◮ These additional funds will be needed leading up to the home purchase. Baziki & C ¸apacıo˘ glu (CBRT) LTV Caps and Additional Loans 11 / 52

Mechanism Supply Side Factors Introduction of a cap frees up funds Banks may chose to reallocate these funds within their loan portfolio ◮ Either by extending residential credit to constrained applicants the bank would otherwise not be in business with, ◮ Or by extending a non-residential loan to residential loan applicants which would result in a higher leverage ratio per the value of the house, ◮ Or switching sides completely and increase commercial lending. Either path, the bank engages in riskier lending behavior. Baziki & C ¸apacıo˘ glu (CBRT) LTV Caps and Additional Loans 12 / 52

Previous Literature : Macroprudential Policies Cross-country studies: Kuttner and Shim (2016), Cerruti et al. (2015), and Lim et al. (2011) Micro-level data: Jim´ enez et al. (2012) and Igan and Kang (2012) ◮ Most macroprudential policies are linked to lower credit growth ◮ Focus on macroprudential policies and house prices or financial cycles Claessens et al. (2014) find policies targeting consumers help bank balance sheets through lower leverage. ◮ But lower leverage in housing loans does not necessarily mean lower risk or leverage on the consumer side ◮ Riksbanken (2012) announced an increase in unsecured loans after the introduction of LTV cap ◮ Furthermore, riskier lending on the commercial side would exacerbate the situation. Baziki & C ¸apacıo˘ glu (CBRT) LTV Caps and Additional Loans 13 / 52

Previous Literature : LTV and Income Related Caps Hallissey et al. (2014) LTV and LTI together lower credit risk on new lending ◮ Loan-level data from 3 banks ◮ Sharp increases in losses on defaulted loans for LTV > 85 % . Jung and Lee (2017) find DTI better at stabilizing HP than LTV. ◮ District-level data on transactions ◮ LTV alone is subject to higher LGD Lee (2012) stable NPL on housing despite lower HP due to LTV and DSTI. J´ acome and Mitra (2015) LTV and DTI together lower credit growth (but not always HP). IMF Staff Guidelines (2014) imply that DSTI increase the effectiveness of LTV as they limit the use of unsecured loans to meet the downpayment limit. Baziki & C ¸apacıo˘ glu (CBRT) LTV Caps and Additional Loans 14 / 52

Data Credit Registry Data ◮ Bank-individual matched data covering 2,984,655 new housing loans that allow for identification of 88% of all housing loans. Housing GP AverageDebt ◮ Interest rate, capital borrowed and remaining, maturity, collateral, location. LTV Data ◮ Available from 2010m1 on all housing loans with appraisal values of all purchases from one dataset. ◮ Another dataset from 2011m1 with further details which we use in the easing analysis. Bank Data ◮ Monthly balance sheet and income statements for 30 banks. ◮ Private, state-owned, foreign-owned and participation banks. ◮ Real assets, loan-to-asset and deposit-to-asset ratios, capital-to-assets ratio, liquid assets to total assets, NPL ratios, ROA. Macro-level Data ◮ Monthly macroeconomic aggregates such as interest rates, IPI, CPI, REER. IntRates Baziki & C ¸apacıo˘ glu (CBRT) LTV Caps and Additional Loans 15 / 52

Changes in Residential Loans ◮ Residential loans (county-month controls): Loan b , i , l , t = β 0 + β 1 After t + β 2 LTV b + β 3 After ∗ LTV b + ζ BankObs b , t − 1 + γ MacroObs t − 1 + α b + η l + θ t + ε b , i , l , t . (1) ◮ BankObs are bank observables : capital, liquidity, NPL, ROA, loan-to-asset ratios, and log real assets taken ex-ante. ◮ MacroObs are macroeconomic observables: interest rates, IPI, CPI, REER taken ex-ante. Baziki & C ¸apacıo˘ glu (CBRT) LTV Caps and Additional Loans 16 / 52

Changes in Residential Loans ◮ Residential loans (county-month controls): Loan b , i , l , t = β 0 + β 1 After t + β 2 LTV b + β 3 After ∗ LTV b + ζ BankObs b , t − 1 + γ MacroObs t − 1 + α b + η l + θ t + ε b , i , l , t . (1) ◮ BankObs are bank observables : capital, liquidity, NPL, ROA, loan-to-asset ratios, and log real assets taken ex-ante. ◮ MacroObs are macroeconomic observables: interest rates, IPI, CPI, REER taken ex-ante. Baziki & C ¸apacıo˘ glu (CBRT) LTV Caps and Additional Loans 16 / 52