Macroprudential measures tighten euro area mortgage lending standards
A new ECB working paper finds that euro area banks generally tightened mortgage lending standards around the implementation of borrower-based macroprudential measures. This effect was strongest contemporaneously and more pronounced during periods of high mortgage or house price growth.
BBMs curb risky lending in real estate
Using data from the ECB's Bank Lending Survey between 2009-Q1 and 2023-Q3 across 15 euro area countries, the study reveals that banks consistently tightened credit standards following the implementation of borrower-based macroprudential measures (BBMs).
This tightening was most pronounced in the quarter of implementation and applied to various BBM types, including limits on loan-to-value (LTV) ratios, debt-service-to-income (DSTI) ratios, and loan maturities.
The research also indicates that legally binding measures had a slightly stronger impact on credit standards compared to non-binding recommendations.
Furthermore, the effects were more significant in periods characterized by high mortgage loan growth or real estate price growth, aligning with the macroprudential objective of smoothing the credit cycle and preventing excessive risk-taking.
Structural backstops for financial stability
Borrower-based macroprudential measures are a key component of the macroprudential policy toolkit, designed to enhance borrower resilience and mitigate excessively risky lending, particularly within the residential real estate sector.
These measures, such as LTV and DSTI limits, are often calibrated as structural backstops.
This means they are intended to be non-binding for the average borrower but effectively constrain the riskiest segments of the mortgage distribution.
Their widespread use since the 2008-09 global financial crisis underscores their importance in addressing systemic risks and contributing to overall financial stability.
Empirical proof for policy effectiveness
This study delivers robust empirical evidence on the effectiveness of borrower-based macroprudential measures in the euro area.
It clearly demonstrates their capacity to tighten lending standards, especially during periods of elevated market growth and potential risk accumulation.
For policymakers, these findings reinforce the critical role of well-calibrated BBMs as a proactive instrument for safeguarding financial stability.