Implementing Loan-to-Value and Debt Service-To-Income measures: A decade of Romanian experience

We describe an example of designing, implementing and calibrating two macroprudential instruments – loan-to-value (LTV) and debt service-to-income (DSTI) – based on a decade of Romanian experience with these tools. We investigate LTV and DSTI effectiveness in trimming down excessive credit growth and in preserving the quality of banks’ loan portfolios. We find strong links between DSTI levels and the debtors’ capacity to repay their debt, underpinning the usefulness of caps for this instrument. We find that an approach based to a large extent on banks’ self-regulation produces suboptimal results, exacerbating the pro-cyclicality in the system. A one‑size-fits-all approach is less effective than tailoring the DSTI and LTV measures based on debtors’ disposable income, the currency of indebtedness and the destination of the loan