Implementing Loan-to-Value Ratios: The Case of Auto Loans in Brazil (2010-11)

This paper discusses the reasons and effects of the Central Bank of Brazil’s decision to raise the risk weight factors (RWF) of auto loans with high LTV and long maturities in 2010. Concerns with origination standards and risk-underpricing, combined with early warnings of loan non-performance given by credit bureau data, led the Central Bank to raise RWF to new auto loans. The calibration of the measure used data on delinquency rates by LTV and maturity and respective LGDs. The measure successfully improved origination standards. Difference-in-difference estimations confirmed the effect of the measure in reducing the origination of new loans with long maturities and with high LTV; while these types of loans became more expensive to borrowers thereby discouraging their demand. The results are important to help formulating and conducting central bank’s monitoring, and prudential regulations