The Effectiveness of Loan-to-Value Ratio Policy and its Interaction with Monetary Policy in New Zealand : An Empirical Analysis Using Supervisory Bank-Level Data

In this paper, we quantify the effect of loan-to-value ratio (LVR) policy, as implemented in New Zealand between 2013 and 2016, in containing mortgage loan growth and credit risk at the bank level. We use the empirical strategy proposed by the BIS and find first that the effect of the LVR policy has, on average, a 2 percentage point negative impact on housing loan growth in the six months after implementation. Controlling for bank characteristics, we find that larger banks and more stably funded banks are less affected by the LVR policy. In addition, we also find evidence that the LVR policy has a statistically significant negative impact on the nonperforming loan ratio, although the economic magnitude is rather small. These results suggest that the LVR policy achieved the intended effect of restricting risky lending and containing credit risk of small and less stably funded banks.Full Publication: "https://ssrn.com/abstract=3550125" Measuring the Effectiveness of Macroprudential Policies Using Supervisory Bank-Level Data