Credit-related Shocks in VAR Models: The Case of Lithuania

Micro-Assessment of Macroprudential Borrower-Based Measures in Lithuania

“…The finding does not consider the potential general equilibrium effects of such regulation, which could have significantly reduced credit and house price growth (Reichenbachas, 2020) and possibly alleviated the impact of the recession, if not prevented it altogether.…”

“…Taking into account the LGD parameter of these loans, the at-origination lifetime ECL rate reached around 0.6 percent, implying that for every housing loan that was nominally worth 100 EUR, 0.6 EUR should have been set aside for future loss allowances. Matkėnaitė and others (2016) and Reichenbachas (2020) show that had the LTV requirement of 85 percent been in place in Lithuania in the 2000s, credit and house price growth would have been much slower, and thus the banking sector would have experienced much smaller mortgage losses during the collapse of 2009. To complement their findings, which concern only the LTV limit, we conduct a similar exercise, looking at risk parameters that would have prevailed if three of the current ASN measures had been present (see Table 1).…”

“…The effectiveness of Lithuania's ASN framework has been studied in only a few papers, primarily concerned with the impact of the LTV requirement. Most notable is that of Reichenbachas (2020), who finds that the imposition of the LTV limit worked countercyclically. The author empirically estimates that had the LTV requirement not been introduced in 2011, the household loan portfolio would have grown, on average, 1.5 percentage point (p.p.)…”

“…In a similar, though significantly more pronounced fashion, the LTV ratio dropped during the GFC (see Figure 7 of Matkėnaitė and others, 2016). For a comparison of the two periods, see Appendix D of Reichenbachas (2020).…”

“…In fact, the post-GFC period can be characterized by lenders' self-corrective behavior, which may have stemmed from either a sudden change in sentiment or realization of risk, or lessons learned from past errors. Therefore, ASN regulation that came into effect in 2011 was not immediately distortionary for the mortgage market (see also Matkėnaitė and others, 2016;Reichenbachas, 2020). Notwithstanding, the limits included in the rulebook set a standard for all market participants, including both creditors and debtors, suppressing the righthand tail of the risk distribution and thus curtailing the procyclicality of risk appetite.…”