## eur-reo-full2

## Source details

**Canonical URL:** [eur-reo-full2](https://www.imf.org/-/media/files/publications/reo/eur/2018/november/eur-reo-full2.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/reo/eur/2018/november/eur-reo-full2.pdf.md)
- [Structured JSON version](/-/media/files/publications/reo/eur/2018/november/eur-reo-full2.pdf.json)

---

### Overview
- Economic activity continued to expand in the first half of 2018, but at a slower-than-expected pace, mainly in advanced Europe.
- Domestic demand, supported by stronger employment and wages, remains the main engine of growth.
- The external environment has become less supportive and is expected to soften further in 2019 owing to slowing global demand, trade tensions, and higher energy prices.
- Growth is projected to moderate from 2.8 percent in 2017 to 2.3 percent in 2018 and 1.9 percent in 2019.
- Growth is expected to remain above potential in most countries in the region.

### The Pace of Economic Expansion Has Slowed
- Euro area GDP growth cooled to 0.2 percent in the third quarter (quarter-on-quarter, annual rate), from 0.4 percent in each of the first two quarters.
- Deceleration drivers: weaker external demand (especially for goods), special factors (inclement weather, car production), and base effects from Q1 2018.
- Signs of softening noted in Romania, Turkey, and the United Kingdom.
- In most CESEE countries, expansion remained robust owing to higher absorption of EU funds and strong private consumption.
- With most confidence indicators down to pre-2017 levels, forward-looking indicators suggest moderation of growth.

### Several Headwinds Are at Play
- External demand: foreign demand for European exports moderated in 2018 and is expected to remain soft in 2019.
- Trade tensions: already-implemented US tariffs on steel and aluminum have had limited direct impact so far, but concerns remain about broader effects.
- Energy and commodity prices:
  - Commodity prices have increased 7 percent since the spring of 2018.
  - Oil prices climbed to $79 a barrel in September, the highest level since 2014.
  - The increase in fuel prices has lifted headline inflation by an average of about ½ percentage point across Europe.
  - For Norway and Russia, the terms-of-trade windfall gains are estimated at about 1.5 percent of GDP each year.
  - In the rest of Europe, higher fuel prices have dampened real disposable incomes by up to 0.7 percentage point of GDP, a worsening of about a third of a percentage point of GDP compared with the April 2018 World Economic Outlook estimates.
- Maturing business cycles and capacity constraints:
  - Output gaps are estimated to be mostly closed or positive.
  - Production capacity constraints and labor shortages are becoming more binding, mostly in emerging Europe.
  - Wage growth exceeded 10 percent annually in several CESEE countries in the first half of 2018.
- Financial conditions:
  - Financial conditions tightened somewhat, especially in vulnerable countries.
  - Turkey experienced a sharp lira depreciation by about 40 percent since the beginning of the year.
  - In Italy, sovereign bond yields rose to a four-year high amid government formation difficulties.

### Outlook: Slower but Above-Potential Growth with Increased Downside Risks
- Regional projections:
  - Real GDP growth: 2.8 percent in 2017 → 2.3 percent in 2018 → 1.9 percent in 2019.
  - Growth revisions (compared with May 2018 REO): down from respective projections of 2.6 percent and 2.2 percent.
- Country- and group-level adjustments:
  - Growth revised down in about half of the countries compared with May 2018 REO, mainly reflecting weaker external demand and higher energy prices.
  - Advanced Europe growth revised down by 0.3 percentage point in 2018 and 0.1 percentage point in 2019 (compared with previous forecast).
  - Germany’s 2018 growth downward revision: 0.6 percentage point.
  - Emerging Europe excluding Turkey: projections unchanged in 2018 and revised up by 0.2 percentage point in both 2019 and 2020.
  - Macedonia, Romania, and Turkey saw downgrades of about 1 percentage point each in 2018.
  - Turkey: growth expected to weaken from 3.5 percent in 2018 to 0.4 percent in 2019 before recovering in 2020.
- Inflation outlook:
  - Headline inflation is expected to increase across European countries due to higher energy prices and positive output gaps.
  - Advanced Europe: inflation revised up by 0.1 percentage point in both 2018 and 2019 to 1.8 percent.
  - Emerging Europe: inflation revisions of 0.8 percentage point in 2018 and 2 percentage points in 2019, largely reflecting Turkey’s outlook.
  - Russia: a pickup in inflation in 2019 is expected due to the recently passed increase in the main value-added-tax rate and additional debt-financed infrastructure spending.

### Risks and Scenarios
- Balance of risks is tilted to the downside both short term and medium term.
- Short-term risks:
  - Escalating trade tensions could disrupt supply chains, lower business confidence, weaken private investment, and tighten financial conditions.
  - A sharp tightening in global financial conditions would expose existing vulnerabilities and could trigger contagion, particularly in economies with weaker fundamentals and limited buffers.
  - A “no-deal” Brexit could create high trade and nontrade barriers between the United Kingdom and the rest of the European Union, with negative consequences for growth.
- Medium-term risks:
  - Delayed fiscal adjustment and structural reforms.
  - Demographic challenges, rising inequality, and declining trust in mainstream policies.
  - Politically popular but unsustainable macroeconomic policies.

### Policy Priorities
- Tailor policy stance to maturing cyclical positions; scale back procyclical fiscal stances.
- Use continued above-potential growth and low unemployment to:
  - Implement structural reforms.
  - Rebuild fiscal buffers and reduce high levels of public debt to create policy space for future shocks.
- Country-specific guidance:
  - Countries with significant vulnerabilities: reduce high public debt and rebuild fiscal buffers.
  - Countries with ample fiscal space and stronger-than-warranted external positions: raise public investment to lift potential growth and promote external rebalancing.
- Monetary policy:
  - Emerging Europe: where inflation pressure is generally building, central banks should gradually normalize monetary policy in a well-communicated manner.
  - Advanced Europe: where underlying inflation pressures are generally subdued, monetary policy should remain supportive to ensure durable increases in inflation toward targets.
- Financial sector and macroprudential policy:
  - Well-targeted macroprudential policies can be useful to address specific financial stability risks.
  - Chapter 2 finds borrower-side measures, supported by lender-side measures, helped reduce the share of riskier mortgages and contributed to improved financial resilience.
  - Evidence is mixed on whether macroprudential policies can contain house price and overall credit growth when monetary policy remains accommodative.

### Macroprudential Policies and Financial Stability: Key Findings
- Increasing use of macroprudential policies (MaPPs) in Europe in recent years to build financial resilience, contain general and sectoral credit growth, and limit house price increases.
- Borrower-side measures, supported by lender-side measures, helped limit the share of riskier mortgages.
- Evidence is mixed on the ability of MaPPs to contain house price growth and overall credit growth against the backdrop of a still-accommodative monetary policy and other factors.
- Thorough assessment of MaPP effectiveness is challenging; conclusive evaluation requires completion of a full economic and financial cycle.
- Country experiences indicate circumvention of MaPPs needs to be addressed.

### Observed Trends in Housing, Credit, and Policy Adoption
- House prices have increased substantially in several European countries over the past few years.
- In most countries with higher house prices, higher house prices have been accompanied by rising household debt and rapid household credit growth.
- Countries with larger postcrisis increases in house prices and household debt tended to adopt more MaPPs.
- The recent reacceleration in house prices prompted adoption of MaPPs in several European countries.

### Objectives of Recently Introduced MaPPs
- Main stated objectives by country authorities:
  - Improving financial stability.
  - Building financial resilience.
  - Containing general and sectoral credit growth.
- Within these broader objectives, policies generally focused on:
  - Protecting borrowers.
  - Strengthening banking systems.
  - Slowing down house price increases (noted as particularly important in the Czech Republic, Estonia, Norway, and Sweden).
- Other targeted concerns:
  - Relaxation of lending standards (Estonia, Norway, Switzerland).
  - Constraining the rise in the share of loans denominated in foreign currency (Hungary).
  - Containing housing sector imbalances and credit cycle swings via capital buffers introduced beginning in 2013 in line with the EU Capital Requirements Directive (CRD IV).

### Types and Design of Macroprudential Measures Implemented
- Loan-to-value (LTV) caps:
  - Caps ranging from 35 to 100 percent, but mostly between 60 and 95 percent.
  - Differentiated ceilings for primary residences, first-time buyers, mortgages with collateral/guarantees/insurance.
  - Since initial adoption, LTV caps tightened in several countries (Czech Republic, Netherlands, Norway, Poland, the Slovak Republic).
- Debt-to-income (DTI)/loan-to-income (LTI) and debt service-to-income (DSTI) caps:
  - DSTI caps vary by borrower income level, currency of denomination, LTV level, or interest fixing period/debt service frequency depending on country.
  - Romania’s DSTI caps are determined by scenario analysis that considers currency, interest rate, and income risks.
  - United Kingdom: only LTI caps implemented.
- Capital Requirements:
  - Half of the EU countries have adopted the full Basel III capital conservation buffer (CB) of 2.5 percent of risk-weighted assets; others are phasing it in gradually.
  - All countries have introduced the countercyclical capital buffer (CCB), but only the Czech Republic, France, Iceland, Norway, the Slovak Republic, Sweden, Switzerland, and the United Kingdom have nonzero buffers.
  - A total of 13 countries have adopted the systemic risk buffer (SRB).
  - Sectoral risk-weight floors and other measures applied in multiple countries.
- Other measures observed include leverage ratios, loan-to-deposit limits, stress tests, liquidity ratios, loan maturity and amortization restrictions, and measures addressing currency risks.

### What Country Case Studies Indicate
- A simple before-after comparison suggests borrower-based MaPPs influenced the dimensions directly targeted by the measures.
- Impact on house prices and overall credit growth was mixed across case studies.
- The relative effectiveness of different macroprudential instruments/measures is not evaluated in this chapter; analysis of relative effectiveness is beyond the chapter’s scope.
- Circumvention of measures emerged as a recurring issue across country experiences.

### Monetary, Fiscal, and Structural Policy Priorities (Selected Recommendations)
- Monetary policy:
  - Where core inflation has picked up and headline inflation has reached or is approaching targets in emerging Europe, central banks should gradually normalize monetary policy in a well-communicated manner.
  - In countries where underlying inflation pressures remain subdued (mostly advanced Europe) monetary policy should remain supportive to ensure durable increases in inflation toward targets.
  - In the euro area, as asset purchases come to an end, forward guidance on interest rates becomes more important to keep policy rates at their current, extraordinarily low levels at least through next summer.
- Fiscal policy:
  - Countries with limited fiscal space and large imbalances should rebuild buffers and ensure macroeconomic stability (examples cited include Italy and Turkey as countries with vulnerabilities).
  - Countries with ample fiscal space and stronger-than-warranted external positions (Germany, Netherlands) should use available space to raise potential output through more public investment and promote external rebalancing.
- Financial sector policies:
  - Targeted macroprudential measures can be particularly useful in addressing specific financial stability risks.
  - Borrower-based measures can be effective in containing the share of high-risk loans.
  - Further progress is needed in cleaning bank balance sheets, including continued reduction in nonperforming loans.
  - In the euro area, increased debt in corporate balance sheets warrants close monitoring, especially among lower-rated companies.
- Structural reforms and resilience:
  - Implement policies to boost labor force participation and foster higher potential growth as capacity constraints become more binding amid weaker productivity growth.
  - Advanced Europe: further reforms of labor and product markets to boost competitiveness and improve productivity.
  - Emerging Europe: enhance institutions, improve the investment environment, and boost labor participation by women and the elderly.
  - Russia: improve the investment climate, boost infrastructure investment and human capital, and improve the efficiency of goods markets.
  - To increase euro area resilience, implement architectural reforms: complete the banking union with common rules and backstops; advance the capital markets union; develop a central fiscal capacity to support macroeconomic stabilization while embedding safeguards against permanent transfers and moral hazard; revamp fiscal rules to make them simpler and easier to enforce.
- Trade:
  - An agreement that minimizes the introduction of new tariff and nontariff barriers would best protect growth and income in the United Kingdom and the EU in the context of Brexit.
  - The European Union and its partners should work together constructively to reduce trade barriers and, whenever possible, resolve disagreements through the World Trade Organization.

### Adoption of Key Macroprudential Measures and Use of Capital Buffers
- Countries have adopted countercyclical buffers; only those with non-zero buffers appear in the figure (as of July 2018).
- Countries with full implementation of capital conservation buffer of 2.5 percent are shown; the rest have adopted the measure which is gradually phasing in.
- Finland adopted SRB in June 2017, but it will not be activated until July 2019.

### Impact on Riskier Mortgages (country cases)
- Czech Republic:
  - CB at 2.5 percent, CCB at 1 percent, SRB ranging within 1 to 3 percent.
  - Tightening of maximum recommended LTV in Q2 2017 followed by decline in share of new mortgages with LTVs above 80 percent and increase in those with LTV between 70 and 80 percent.
  - Debt-servicing and loan-to-income ratios did not show a meaningful improvement over the period.
- Denmark:
  - Consumer protection clause (2015) mandates at least a 5 percent down payment, translating into a 95 percent maximum LTV.
  - Share of new borrowers with LTV above 95 percent declined markedly; share with LTV between 80 and 90 percent declined slightly.
- Hungary:
  - March 2010: 75/60/45 percent maximum LTV ratios for mortgages in local currency, euros, and other currencies.
  - Beginning in 2015: maximum LTV ratios adjusted to 80, 50, and 35 percent and complemented with payment-to-income ratios (PTIs).
  - PTI ratios for borrowers with net monthly income below Ft 400,000 (about €1,250) are 50/25/10 percent; for higher-income borrowers: 60/30/15 percent.
  - Effective October 2018, and to be further tightened beginning in July 2019, PTI ratios modified to encourage longer interest rate fixing periods.
  - Share of new housing loans with LTV over 70 percent more than halved to about 30 percent in H1 2017 compared with 2009.
- Norway:
  - After LTV cap, share of new loans with LTV above 85 percent declined.
  - DTI measure effective beginning of 2017 led to a decline of about 7 percentage points in the share of new mortgages with a DTI cap of more than 500 percent in 2016; this share was 2 percent in 2017.
- Israel:
  - LTV caps adopted November 2012: 75 percent for first-time buyers and 50 percent for mortgages for investment properties.
  - Proportion of new mortgages with LTV >75 percent declined from 6 percent in October 2012 to 0.5 percent by February 2014.
- Slovak Republic:
  - LTV measures implemented in 2014 and decision to set CCB to 0.5 percent helped improve lending standards and credit quality.
  - Share of new loans with LTV >90 percent fell to below 20 percent by Q2 2015 and to 6.3 percent by Q3 2016.
- Sweden:
  - 2010 mortgage cap: new mortgage loans must not exceed 85 percent of home value.
  - Difference-in-differences study found households limited by mortgage cap borrowed approximately 13 percent less and purchased homes approximately 10 percent less expensive than otherwise (Finansinspektionen 2017).
- Switzerland:
  - Risk weights raised for part of residential mortgage in excess of 80 percent LTV beginning in 2013.
  - Proportion of new mortgages with LTV >80 percent declined by about 5 percentage points in 2013.
  - Activated CCB in 2013: initially 1 percent, raised to 2 percent in 2014.

### Impact on House Prices and Credit Growth
- Overall assessment: mixed picture of MaPPs' impact on house prices and overall credit growth.
- Examples:
  - Denmark: house price growth at national level was not accompanied by rapid growth in bank credit.
  - Switzerland: real estate price growth and pace of mortgage lending gradually eased after MaPPs.
  - Czech Republic, Hungary, Slovak Republic: house prices continued to grow rapidly after MaPPs, though measures may have contained faster increases.
  - Israel: MaPPs reduced share of risky loans, but credit to households continued to rise gradually relative to GDP; house prices continued to rise.
  - Norway and Sweden: counterfactual analysis indicates MaPPs may have contributed to containing household credit and house price growth, although counterfactual paths are imprecisely estimated.
- Country-specific observations:
  - Sweden’s amortization requirements seem to have dampened house prices at least initially.
  - MaPPs had a lasting moderating effect on household debt levels, but only a transitory impact on house prices in Switzerland.
  - Hungary: house price growth appears to have stabilized following measures.

### Circumvention, Cross-border Issues, and Policy Interactions
- Evidence of partial circumvention by nonbank financing and other avenues in some countries (Bulgaria, Romania, Switzerland, Czech Republic, Estonia).
- Jurisdictions are seeking to broaden MaPP application to avoid circumvention (example: Iceland, Slovak Republic).
- Within ESRB member countries there is a framework to ensure reciprocity of macroprudential instruments under CRR/CRD IV; reciprocity has occurred in several instances. Reciprocity of other instruments, including LTV and DTI limits, remains voluntary.
- Interaction with other policies:
  - MaPPs are more effective when reinforced by monetary policy, but monetary policy primarily targets price stability.
  - Other policy instruments affecting housing markets have been used: restrictions on covered bond funding, planned reduction in mortgage interest tax deductibility, and proposed taxes on multiple property owners.

### Conclusions and Policy Lessons
- Context and recent policy actions:
  - Monetary policy remained accommodative in most countries while house prices were on the rise, prompting stepped-up implementation of MaPPs.
  - Most-used measures: borrower-side measures (LTVs, DTIs/LTIs, amortization requirements) and bank capital requirements (CCB, SRB, D-SIIs, risk-weight floors).
- Evidence on effectiveness:
  - Borrower-side measures, supported by lender-based measures, help limit the share of riskier mortgages.
  - In most countries following MaPP introduction, growth of high-LTV mortgages slowed down.
  - Whether MaPPs can contain house price and credit bubbles while monetary policy remains accommodative is difficult to establish.
  - Comprehensive evaluation is premature because implementation is recent and full cycles have not been observed.
- Interaction with complementary instruments:
  - Open question on reliance on MaPPs versus complementary instruments (tax policy, mortgage interest deductibility, zoning, construction, planning).
  - Appropriate policy mix should reflect specific forces driving excessive lending and house price increases.
- Counterfactual analysis (Norway and Sweden):
  - VAR-based counterfactuals suggest household credit growth would have been higher without measures; statistical significance is stronger for Norway than Sweden.
  - House price counterfactuals are above actual values in Sweden (not significant) and positive only in 2017 for Norway with large confidence intervals.
  - Interpretation: MaPPs appear to affect house prices and household credit with delays; results are suggestive but require caution.

*International Monetary Fund | November 2018 — Regional Economic Outlook: Europe (Chapter excerpt provided in source content)*

### Executive Summary vi

### Executive Summary vi

### Overview
- Economic activity continued to expand in the first half of 2018, but at a slower-than-expected pace, mainly in advanced Europe.
- Domestic demand, supported by stronger employment and wages, remains the main engine of growth.
- The external environment has become less supportive and is expected to soften further in 2019 owing to slowing global demand, trade tensions, and higher energy prices.
- Growth is projected to moderate from 2.8 percent in 2017 to 2.3 percent in 2018 and 1.9 percent in 2019.
- Growth is expected to remain above potential in most countries in the region.

### The Pace of Economic Expansion Has Slowed
- Euro area GDP growth cooled to 0.2 percent in the third quarter (quarter-on-quarter, annual rate), from 0.4 percent in each of the first two quarters.
- Deceleration drivers: weaker external demand (especially for goods), special factors (inclement weather, car production), and base effects from Q1 2018.
- Signs of softening noted in Romania, Turkey, and the United Kingdom.
- In most CESEE countries, expansion remained robust owing to higher absorption of EU funds and strong private consumption.
- With most confidence indicators down to pre-2017 levels, forward-looking indicators suggest moderation of growth.

### Several Headwinds Are at Play
- External demand: foreign demand for European exports moderated in 2018 and is expected to remain soft in 2019.
- Trade tensions: already-implemented US tariffs on steel and aluminum have had limited direct impact so far, but concerns remain about broader effects.
- Energy and commodity prices:
  - Commodity prices have increased 7 percent since the spring of 2018.
  - Oil prices climbed to $79 a barrel in September, the highest level since 2014.
  - The increase in fuel prices has lifted headline inflation by an average of about ½ percentage point across Europe.
  - For Norway and Russia, the terms-of-trade windfall gains are estimated at about 1.5 percent of GDP each year.
  - In the rest of Europe, higher fuel prices have dampened real disposable incomes by up to 0.7 percentage point of GDP, a worsening of about a third of a percentage point of GDP compared with the April 2018 World Economic Outlook estimates.
- Maturing business cycles and capacity constraints:
  - Output gaps are estimated to be mostly closed or positive.
  - Production capacity constraints and labor shortages are becoming more binding, mostly in emerging Europe.
  - Wage growth exceeded 10 percent annually in several CESEE countries in the first half of 2018.
- Financial conditions:
  - Financial conditions tightened somewhat, especially in vulnerable countries.
  - Turkey experienced a sharp lira depreciation by about 40 percent since the beginning of the year.
  - In Italy, sovereign bond yields rose to a four-year high amid government formation difficulties.

### Outlook: Slower but Above-Potential Growth with Increased Downside Risks
- Regional projections:
  - Real GDP growth: 2.8 percent in 2017 → 2.3 percent in 2018 → 1.9 percent in 2019.
  - Growth revisions (compared with May 2018 REO): down from respective projections of 2.6 percent and 2.2 percent.
- Country- and group-level adjustments:
  - Growth revised down in about half of the countries compared with May 2018 REO, mainly reflecting weaker external demand and higher energy prices.
  - Advanced Europe growth revised down by 0.3 percentage point in 2018 and 0.1 percentage point in 2019 (compared with previous forecast).
  - Germany’s 2018 growth downward revision: 0.6 percentage point.
  - Emerging Europe excluding Turkey: projections unchanged in 2018 and revised up by 0.2 percentage point in both 2019 and 2020.
  - Macedonia, Romania, and Turkey saw downgrades of about 1 percentage point each in 2018.
  - Turkey: growth expected to weaken from 3.5 percent in 2018 to 0.4 percent in 2019 before recovering in 2020.
- Inflation outlook:
  - Headline inflation is expected to increase across European countries due to higher energy prices and positive output gaps.
  - Advanced Europe: inflation revised up by 0.1 percentage point in both 2018 and 2019 to 1.8 percent.
  - Emerging Europe: inflation revisions of 0.8 percentage point in 2018 and 2 percentage points in 2019, largely reflecting Turkey’s outlook.
  - Russia: a pickup in inflation in 2019 is expected due to the recently passed increase in the main value-added-tax rate and additional debt-financed infrastructure spending.

### Risks and Scenarios
- Balance of risks is tilted to the downside both short term and medium term.
- Short-term risks:
  - Escalating trade tensions could disrupt supply chains, lower business confidence, weaken private investment, and tighten financial conditions.
  - A sharp tightening in global financial conditions would expose existing vulnerabilities and could trigger contagion, particularly in economies with weaker fundamentals and limited buffers.
  - A “no-deal” Brexit could create high trade and nontrade barriers between the United Kingdom and the rest of the European Union, with negative consequences for growth.
- Medium-term risks:
  - Delayed fiscal adjustment and structural reforms.
  - Demographic challenges, rising inequality, and declining trust in mainstream policies.
  - Politically popular but unsustainable macroeconomic policies.

### Policy Priorities
- Tailor policy stance to maturing cyclical positions; scale back procyclical fiscal stances.
- Use continued above-potential growth and low unemployment to:
  - Implement structural reforms.
  - Rebuild fiscal buffers and reduce high levels of public debt to create policy space for future shocks.
- Country-specific guidance:
  - Countries with significant vulnerabilities: reduce high public debt and rebuild fiscal buffers.
  - Countries with ample fiscal space and stronger-than-warranted external positions: raise public investment to lift potential growth and promote external rebalancing.
- Monetary policy:
  - Emerging Europe: where inflation pressure is generally building, central banks should gradually normalize monetary policy in a well-communicated manner.
  - Advanced Europe: where underlying inflation pressures are generally subdued, monetary policy should remain supportive to ensure durable increases in inflation toward targets.
- Financial sector and macroprudential policy:
  - Well-targeted macroprudential policies can be useful to address specific financial stability risks.
  - Chapter 2 finds borrower-side measures, supported by lender-side measures, helped reduce the share of riskier mortgages and contributed to improved financial resilience.
  - Evidence is mixed on whether macroprudential policies can contain house price and overall credit growth when monetary policy remains accommodative.

*Source: Executive Summary, Regional Economic Outlook: Europe (Fall 2018), International Monetary Fund | November 2018*

### 1. Value-Added Exports of Goods and Services, 2013

### 1. Value-Added Exports of Goods and Services, 2013

### Macroprudential Policies and Financial Stability: Key Findings
- Increasing use of macroprudential policies (MaPPs) in Europe in recent years to build financial resilience, contain general and sectoral credit growth, and limit house price increases.
- Borrower-side measures, supported by lender-side measures, helped limit the share of riskier mortgages.
- Evidence is mixed on the ability of MaPPs to contain house price growth and overall credit growth against the backdrop of a still-accommodative monetary policy and other factors.
- Thorough assessment of MaPP effectiveness is challenging; conclusive evaluation requires completion of a full economic and financial cycle.
- Country experiences indicate circumvention of MaPPs needs to be addressed.

### Observed Trends in Housing, Credit, and Policy Adoption
- House prices have increased substantially in several European countries over the past few years (Figure 2.1).
- In most countries with higher house prices, higher house prices have been accompanied by rising household debt (Figure 2.2) and rapid household credit growth (Figure 2.3).
- Countries with larger postcrisis increases in house prices and household debt tended to adopt more MaPPs (Figures 2.4–2.6).
- The recent reacceleration in house prices prompted adoption of MaPPs in several European countries.

### Objectives of Recently Introduced MaPPs
- Main stated objectives by country authorities:
  - Improving financial stability.
  - Building financial resilience.
  - Containing general and sectoral credit growth.
- Within these broader objectives, policies generally focused on:
  - Protecting borrowers.
  - Strengthening banking systems.
  - Slowing down house price increases (noted as particularly important in the Czech Republic, Estonia, Norway, and Sweden).
- Other targeted concerns:
  - Relaxation of lending standards (Estonia, Norway, Switzerland).
  - Constraining the rise in the share of loans denominated in foreign currency (Hungary).
  - Containing housing sector imbalances and credit cycle swings via capital buffers introduced beginning in 2013 in line with the EU Capital Requirements Directive (CRD IV).

### Types and Design of Macroprudential Measures Implemented
- Loan-to-value (LTV) caps:
  - Introduced in response to fast growth of mortgage lending.
  - Caps ranging from 35 to 100 percent, but mostly between 60 and 95 percent.
  - Caps often differentiated: less binding ceilings on primary residences (Cyprus), for first-time buyers (Finland, Ireland), or for mortgages with collateral, guarantees, or insurance (Estonia, Latvia, Poland, Romania).
  - Mortgages in foreign currencies (Hungary, Poland, Romania) or for nonprimary residences in the capital city (Norway) are subject to more stringent caps.
  - Since initial adoption, LTV caps tightened in several countries (Czech Republic, Netherlands, Norway, Poland, the Slovak Republic).
- Debt-to-income (DTI)/loan-to-income (LTI) and debt service-to-income (DSTI) caps:
  - Many countries introduced either DTI/LTI or DSTI caps; the Slovak Republic adopted both LTI and DSTI caps.
  - DSTI caps vary by borrower income level (Czech Republic, Hungary, Poland, Portugal, the Slovak Republic, Slovenia), currency of denomination (Cyprus and Hungary), LTV level (Lithuania), or interest fixing period/debt service frequency (Hungary and Slovak Republic).
  - Romania’s DSTI caps are determined by scenario analysis that considers currency, interest rate, and income risks.
  - In the Czech Republic, Ireland, Norway, the Slovak Republic, DTI/LTI caps were introduced as complements to LTV caps.
  - In the United Kingdom, only LTI caps have been implemented.
- Capital Requirements:
  - Half of the EU countries have adopted the full Basel III capital conservation buffer (CB) of 2.5 percent of risk-weighted assets; others are phasing it in gradually.
  - All countries have introduced the countercyclical capital buffer (CCB), but only the Czech Republic, France, Iceland, Norway, the Slovak Republic, Sweden, Switzerland, and the United Kingdom have nonzero buffers.
  - A total of 13 countries have adopted the systemic risk buffer (SRB).
  - Some countries imposed sectoral risk-weight floors on commercial real estate (Croatia, Finland, Ireland, Norway, Romania, Sweden) and residential mortgages (Belgium, Croatia, Norway, Slovenia, Sweden).
  - Poland has imposed a risk weight of 150 percent on foreign-exchange-denominated household mortgages.
- Other measures observed include sectoral risk-weight floors, leverage ratios, loan-to-deposit limits, stress tests, liquidity ratios, loan maturity and amortization restrictions, and measures addressing currency risks.

### What Country Case Studies Indicate
- A simple before-after comparison suggests borrower-based MaPPs influenced the dimensions directly targeted by the measures.
- Impact on house prices and overall credit growth was mixed across case studies.
- The relative effectiveness of different macroprudential instruments/measures is not evaluated in this chapter; analysis of relative effectiveness is beyond the chapter’s scope.
- Circumvention of measures emerged as a recurring issue across country experiences.

### Monetary, Fiscal, and Structural Policy Priorities (Selected Recommendations)
- Monetary policy:
  - Where core inflation has picked up and headline inflation has reached or is approaching targets in emerging Europe, central banks should gradually normalize monetary policy in a well-communicated manner.
  - In countries where underlying inflation pressures remain subdued (mostly advanced Europe) monetary policy should remain supportive to ensure durable increases in inflation toward targets.
  - In the euro area, as asset purchases come to an end, forward guidance on interest rates becomes more important to keep policy rates at their current, extraordinarily low levels at least through next summer.
- Fiscal policy:
  - Countries with limited fiscal space and large imbalances should rebuild buffers and ensure macroeconomic stability (examples cited include Italy and Turkey as countries with vulnerabilities).
  - Countries with ample fiscal space and stronger-than-warranted external positions (Germany, Netherlands) should use available space to raise potential output through more public investment and promote external rebalancing.
- Financial sector policies:
  - Targeted macroprudential measures can be particularly useful in addressing specific financial stability risks.
  - Borrower-based measures can be effective in containing the share of high-risk loans.
  - Further progress is needed in cleaning bank balance sheets, including continued reduction in nonperforming loans.
  - In the euro area, increased debt in corporate balance sheets warrants close monitoring, especially among lower-rated companies.
- Structural reforms and resilience:
  - Implement policies to boost labor force participation and foster higher potential growth as capacity constraints become more binding amid weaker productivity growth.
  - Advanced Europe: further reforms of labor and product markets to boost competitiveness and improve productivity.
  - Emerging Europe: enhance institutions, improve the investment environment, and boost labor participation by women and the elderly.
  - Russia: improve the investment climate, boost infrastructure investment and human capital, and improve the efficiency of goods markets.
  - To increase euro area resilience, implement architectural reforms: complete the banking union with common rules and backstops; advance the capital markets union; develop a central fiscal capacity to support macroeconomic stabilization while embedding safeguards against permanent transfers and moral hazard; revamp fiscal rules to make them simpler and easier to enforce.
- Trade:
  - An agreement that minimizes the introduction of new tariff and nontariff barriers would best protect growth and income in the United Kingdom and the EU in the context of Brexit.
  - The European Union and its partners should work together constructively to reduce trade barriers and, whenever possible, resolve disagreements through the World Trade Organization.

*International Monetary Fund | November 2018 — Regional Economic Outlook: Europe (Chapter excerpt provided in source content)*

### 3. Use of Capital Buffers

### 3. Use of Capital Buffers

### Adoption of Key Macroprudential Measures
- Countries have adopted countercyclical buffers; only those with non-zero buffers appear in the figure (as of July 2018).
- Countries with full implementation of capital conservation buffer of 2.5 percent are shown; the rest have adopted the measure which is gradually phasing in.
- Finland adopted SRB in June 2017, but it will not be activated until July 2019.

### Impact on Riskier Mortgages (country cases)
- Czech Republic
  - Lender-based measures in place since 2014 included CB at 2.5 percent, CCB at 1 percent, and SRB ranging within 1 to 3 percent.
  - Tightening of maximum recommended LTV in Q2 2017 was followed by a clear decline in share of new mortgages with LTVs above 80 percent and an increase in those with LTV between 70 and 80 percent.
  - Debt-servicing and loan-to-income ratios did not show a meaningful improvement over the period.
- Denmark
  - Restrictions on borrowing capacity relative to disposable income and interest rate sensitivity in effect since 2014.
  - Consumer protection clause (2015) mandates at least a 5 percent down payment, translating into a 95 percent maximum LTV.
  - Share of new borrowers with LTV above 95 percent declined markedly; share with LTV between 80 and 90 percent declined slightly.
  - 2017 guidelines on good business practices increased borrower resilience (for instance by promoting a higher share of fixed-rate mortgages) and limited excessive leverage by households with lower incomes.
- Hungary
  - March 2010: 75/60/45 percent maximum LTV ratios for mortgages in local currency, euros, and other currencies.
  - Beginning in 2015: maximum LTV ratios adjusted to 80, 50, and 35 percent and complemented with payment-to-income ratios (PTIs, akin to DSTIs).
  - PTI ratios for borrowers with net monthly income below Ft 400,000 (about €1,250) are 50/25/10 percent; for higher-income borrowers: 60/30/15 percent.
  - Effective October 2018, and to be further tightened beginning in July 2019, PTI ratios modified to encourage longer interest rate fixing periods.
  - April 2017: mortgage funding adequacy ratio introduced to ensure stable long-term funding for long-term mortgage lending.
  - Share of new housing loans with LTV over 70 percent more than halved to about 30 percent in H1 2017 compared with 2009.
- Norway
  - Implemented higher capital and liquidity requirements (CB, CCB, SRB, D‑SIIs), leverage ratios in 2013–17, and borrower-based measures (LTV limit, DTI limit, amortization requirements).
  - After LTV cap, share of new loans with LTV above 85 percent declined.
  - DTI measure effective beginning of 2017 led to a decline of about 7 percentage points in the share of new mortgages with a DTI cap of more than 500 percent in 2016; this share was 2 percent in 2017.
- Israel
  - LTV caps adopted November 2012: 75 percent for first-time buyers and 50 percent for mortgages for investment properties.
  - March 2013: risk weights increased to 50 percent for LTV 45–60 percent, and to 75 percent for LTV above 60 percent.
  - Proportion of new mortgages with LTV >75 percent declined from 6 percent in October 2012 to 0.5 percent by February 2014; mortgages with LTV 60–75 percent also declined modestly.
  - Significant drop in 2016 likely related to regulatory requirements fully implemented in 2015 and fiscal measures to discourage investor demand.
- Slovak Republic
  - LTV measures implemented in 2014 and decision to set CCB to 0.5 percent have helped improve lending standards and credit quality.
  - Share of new loans with LTV >90 percent fell to below 20 percent by Q2 2015 and to 6.3 percent by Q3 2016.
  - Proportion of new mortgages with LTV 80–90 percent initially increased but later declined noticeably.
- Sweden
  - 2010 mortgage cap: new mortgage loans must not exceed 85 percent of home value.
  - Share of high-LTV mortgages declined after measures.
  - Difference-in-differences study found households limited by mortgage cap borrowed approximately 13 percent less and purchased homes approximately 10 percent less expensive than otherwise (Finansinspektionen 2017). Greatest effect outside metropolitan regions.
- Switzerland
  - Beginning of 2013: risk weights raised for part of residential mortgage in excess of 80 percent LTV.
  - Proportion of new mortgages with LTV >80 percent declined by about 5 percentage points in 2013.
  - First in Europe to activate CCB in 2013, initially set at 1 percent and raised to 2 percent in 2014.
  - Capital-constrained or mortgage-intensive banks raised mortgage rates; new mortgage loans shifted to better-capitalized and less-mortgage-intensive institutions.

### Impact on House Prices and Credit Growth
- Overall assessment: mixed picture of MaPPs' impact on house prices and overall credit growth.
- Examples:
  - Denmark: house price growth at national level was not accompanied by rapid growth in bank credit; mortgage-targeted measures unlikely to affect house price dynamics.
  - Switzerland: following MaPPs, real estate price growth and pace of mortgage lending gradually eased.
  - Czech Republic, Hungary, Slovak Republic: house prices continued to grow rapidly after MaPPs, though measures may have contained faster increases.
  - Israel: MaPPs reduced share of risky loans, but credit to households continued to rise gradually relative to GDP; house prices continued to rise, reflecting low interest rates and housing supply impediments. Deceleration in house prices since late 2016 reflects proposed fiscal measures to discourage investor demand, a rise in mortgage interest rates linked to capital surcharges on mortgage lending, and market uncertainty associated with the Buyer’s Price program.
  - Norway and Sweden: deeper counterfactual analysis indicates MaPPs may have contributed to containing household credit and house price growth, although counterfactual paths are imprecisely estimated.
- Country-specific observations from figures:
  - Sweden’s amortization requirements seem to have dampened house prices at least initially, but other factors such as increased housing supply may also have played a role.
  - MaPPs had a lasting moderating effect on household debt levels, but only a transitory impact on house prices in Switzerland.
  - Hungary: house price growth appears to have stabilized following measures.

### Circumvention, Cross-border Issues, and Policy Interactions
- Evidence of partial circumvention by nonbank financing and other avenues in some countries.
  - Bulgaria and Romania: measures imposed on banks before the global financial crisis were partly circumvented through loan booking with nonbank financial institutions (Dimova, Kongsamut, and Vandenbussche 2016).
  - Switzerland: mortgage loans by pension funds and insurance companies are growing faster than bank mortgage loans (albeit small), warranting monitoring.
  - Czech Republic: consumer credit may have substituted for mortgages.
  - Estonia: mid-2000s macroprudential measures believed to have been less effective due to cross-border circumvention.
- Responses and reciprocity
  - Jurisdictions are seeking to broaden MaPP application to avoid circumvention (example: Iceland introduced a binding LTV for new mortgage loans applicable to all institutions providing mortgages in July 2017).
  - Slovak Republic introduced binding limits on DSTI ratio (80 percent) and on maturity (eight years) for new consumer loans, applying to all providers domestic or foreign.
  - Within ESRB member countries there is a framework to ensure reciprocity of macroprudential instruments under CRR/CRD IV; reciprocity has occurred in several instances. Reciprocity of other instruments, including LTV and DTI limits, remains voluntary.
- Interaction with other policies
  - MaPPs are more effective when reinforced by monetary policy, but monetary policy primarily targets price stability and may not always support MaPPs.
  - Other policy instruments affecting housing markets have been used:
    - Hungary: covered bond funding restricted to low-LTV loans after the crisis to improve funding stability.
    - Denmark, Finland, Netherlands, Sweden: planned reduction in scope of mortgage interest tax deductibility will help contain housing market imbalances.
    - Israel: proposed tax on owners of more than two apartments likely resulted in a decline in housing transactions in 2017 (Baudot-Trajtenberg, Tzur-Ilan, and Frayberg 2018).

*International Monetary Fund | November 2018*

### Conclusions and Policy Lessons

### Conclusions and Policy Lessons

### Context and recent policy actions
- Monetary policy remained accommodative in most countries while house prices were on the rise, prompting stepped-up implementation of macroprudential policies (MaPPs).
- The most-used measures are:
  - Borrower-side measures: LTVs, DTIs/LTIs, stepped-up amortization requirements.
  - Bank capital requirements: countercyclical capital buffers, systemic risk buffers, systematically financial institution buffers, floors on risk weights.
- Implementation challenges noted:
  - Potential leakages and circumvention.
  - Borrower-based measures are not always applied to all types of loans.

### Evidence on effectiveness of MaPPs
- General finding:
  - There is evidence that borrower-side measures, supported by lender-based measures, help limit the share of riskier mortgages, making economies more resilient.
  - In most countries following MaPP introduction, growth of high-LTV mortgages slowed down.
- Limits and caveats:
  - Whether MaPPs can contain the formation of house price and credit bubbles while monetary policy remains accommodative is difficult to establish.
  - In some countries household credit and house price growth slowed after borrower-based measures; in others they did not.
  - Implementation of MaPPs is recent; most countries have not gone through a full economic and financial cycle, so comprehensive evaluation is premature.
  - Isolated impact of MaPPs is empirically challenging to identify from other intervening factors.

### Interaction with complementary instruments
- Open policy question:
  - To what extent should countries rely on MaPPs versus complementary instruments (tax policy, mortgage interest deductibility, zoning, construction, and planning restriction)?
- Proposed approach:
  - The appropriate mix should be a function of the specific forces driving excessive lending and house price increases.

### Counterfactual analysis: Norway and Sweden (Box 2.1)
- Methodology overview:
  - Counterfactual growth rates of household credit and house prices projected using a VAR estimated on pre-measure data (from Q1 2003 for Norway; Q1 1981 for Sweden).
  - Model included housing-specific variables (household credit growth, house price growth, housing starts/completions, house sales) and macroeconomic variables (household income growth, output gap, net immigration rate, population growth, mortgage interest rate).
  - Projections conditioned on actual behavior of macroeconomic variables after measures became effective.
- Key results:
  - Household credit growth:
    - Analysis suggests household credit growth would have been higher without the measures, but statistical significance is borderline.
    - Actual credit growth paths remain below counterfactuals in both countries.
    - The difference becomes statistically significant at the 95 percent confidence level in Norway starting several quarters after MaPP introduction.
    - In Sweden, actual credit growth is close to—but still within—the lower bound of the confidence interval.
  - House price growth:
    - Counterfactuals are above actual values in Sweden, but not significantly so.
    - In Norway, the difference is positive only in 2017, with a very large estimated confidence interval.
- Interpretation:
  - MaPPs appear to affect house prices and household credit with delays; mitigating impacts may become larger over time.
  - Results are suggestive of some effect on household credit but should be interpreted with care given short post-implementation windows and identification challenges.

---


_Source: https://www.imf.org/-/media/files/publications/reo/eur/2018/november/eur-reo-full2.pdf_