## Conclusions and Policy Implications ## Source details **Canonical URL:** [Conclusions and Policy Implications](https://www.imf.org/-/media/files/publications/selected-issues-papers/2024/english/sipea2024008.pdf) ## Other formats - [Markdown version](/-/media/files/publications/selected-issues-papers/2024/english/sipea2024008.pdf.md) - [Structured JSON version](/-/media/files/publications/selected-issues-papers/2024/english/sipea2024008.pdf.json) --- ### Introduction and Rationale for BBMs - The Greek financial system has remained resilient, supported by strengthening banks’ balance sheets, but faces significant challenges including the re-emergence of imbalances in the real estate market. - The Bank of Greece (BoG) has introduced a legal framework enabling borrower-based measures (BBMs), allowing activation of income- and collateral-based measures in the near term. - Simulations using a quantitative framework combining micro- and macro-level data show BBMs can enhance household resilience and, jointly (DSTI and LTV caps), lead to a more resilient banking system over time. - Recommendation: Caps could initially be set at less binding levels and be gradually tightened based on systemic risk assessment. ### Select Systemic Risk Assessment - Residential real estate prices: - Increased by more than 50 percent in nominal terms since the 2017 trough. - Increased by 35 percent in real terms since the 2017 trough. - Price-to-income ratio exceeded historical long-term average by 6 percent in 2023. - Price-to-rent ratio exceeded historical long-term average by 29 percent in 2023. - An econometric model suggests a price overvaluation of 8 percent in 2023. - Demand drivers: - Strong employment and real disposable income growth. - Increased nonresident investment (e.g., Golden Visa program). - Supply response: - Housing investment as a share of GDP and building permits doubled since 2016 (from a low base). - Household sector and bank exposures: - Household sector leverage and banking exposure to the real estate sector have declined since the sovereign debt crisis. - Household debt service remained one of the highest in the EU (housing costs in disposable income and the debt service ratio). - Some increase in the debt service-to-income (DSTI) ratio (BoG, 2023b). - Greece recorded the highest share of loan-to-value (LTV) ratio exceeding 80 percent among the EU countries (EBA, 2022). - Based on BoG data, the share of new loan disbursements with an LTV>80% stood at 5.7% in Q2 2023. - Overall bank exposure to real estate is below the EU average and less than pre-GFC levels. ### Macroprudential Policy Options: Instruments, Trade-offs, and Timing - BoG legal framework (amended in 2023) allows BBMs for financial institutions operating in Greece, covering credit secured by real estate located in Greece; BoG may set types of BBMs, affected credit types, cap percentages, and implementation conditions. - Core BBM instruments: - Income-based: Caps on DSTI to limit debt repayment burden and reduce probability of default (PD). - Collateral-based: Caps on LTV to reduce loss given default (LGD) and limit unsecured loan portions. - Complementary measures: maturity limits, loan amortization, risk weights, targeted capital-based measures (CBMs). - Trade-offs: - BBM caps balance risk mitigation (excluding/reducing riskier loans) against costs to credit intermediation and access for lower-income borrowers. - Evidence: BBMs contain house prices but can adversely impact credit and GDP (panel VAR and cross-country studies cited). - Distributional effects appear limited in some studies. - Timing and calibration: - Early activation in real estate cycle can address vulnerabilities while they are building up. - In more mature cycles, combining BBMs and CBMs can enhance both borrower and lender resilience. - Calibration may be binding or nonbinding depending on lending standards and objectives; static or dynamic over the cycle. - Speed limits and exceptions can target segments (e.g., young households); exceptions may allow a fraction of new lending to exceed limits for lower-risk borrowers. ### Implementation in the EU Context - BBMs are widely implemented in the EU: - DSTI caps implemented in 14 countries. - LTV caps implemented in 20 countries. - Greece is among the few EU countries without BBMs prior to the 2023 legal change, unlike Cyprus, Ireland, and Portugal which implemented BBMs earlier. ### Policy Calibration Framework and Methodology - Framework combines micro-level HFCS household data for Greece with macro-level quarterly data from the ECB and national sources. - Model outputs: - Individual households’ simulated PDs, LGDs, and loss rates (LRs). - Mapping of household risk parameters to bank mortgage portfolios to assess capital impact. - The framework accounts for macro-financial feedback from policies via reduced credit demand. - Steps in the analysis: - First-round effects: direct impact of BBMs on PDs, LGDs, and LRs. - Second-round effects: additional impacts from negative loan demand shocks on PDs, LGDs, and LRs. - Final step: computes impact on banks’ capital adequacy ratios via reduced loan losses and lower risk weights. ### Impact on Household Resilience (Simulation Findings) - DSTI vs LTV effects: - PDs decline sharply from a DSTI cap at around 90 percent, with a sizeable impact at 50 percent and maximal impact at the left end of the DSTI cap range. - LTV caps have a smaller estimated impact on PDs compared to DSTI caps. - LTV caps significantly reduce LGDs, with LGDs declining sharply from an LTV cap at around 90 percent. - DSTI caps do not significantly affect LGDs. - Crowding out and mortgage volume: - Mortgages reduced due to caps imply a stronger impact of LTV caps on crowding out compared to loss-rate-equivalent DSTI caps. - For a smaller share of the population, DSTI caps would be binding to achieve the same loss rate reduction as the corresponding LTV cap. - Mapping example: - An LTV cap at 85 percent maps approximately to an equivalent DSTI cap of around 40 percent. - Calibration used for key results: - DSTI = 40 percent and LTV = 85 percent. - Alternative calibration reported: DSTI = 45 percent and LTV = 90 percent (results presented in Appendix 2). - Policy implication: - DSTI caps are more potent in reducing PDs. - LTV caps are more effective at reducing LGDs. - Joint implementation yields synergies enhancing borrower resilience to income and interest-rate shocks, and reduces portfolio loss rates (PDs and LGDs), improving bank resilience over the medium term. ### Impact on Bank Resilience - BBMs have a positive impact on bank capital, measured by CET1 ratios. - Effect is stronger for DSTI caps compared to LTV caps. - Estimated impact is relatively sizeable despite reflecting only the mortgage loan portfolio. - Decomposition: - Reduced loan losses from the mortgage credit portfolio outweigh the lower risk weights owing to lower PDs and LGDs. - Figures referenced in analysis: Figure 6 (Impact on Households) and Figure 7 (Impact on Bank Capital) based on HFCS and IMF staff calculations. ### Macro-financial Context and Vulnerabilities - Historical context: - Greece experienced a protracted distress period involving substantial household deleveraging and a real estate market correction. - House prices have increased significantly since its trough in 2017. - Drivers of recent house price increases: - Strong employment and real disposable income growth. - Demand from nonresidents. - Lingering structural imbalances in the real estate sector. - Supply and valuation: - There was a significant supply response, but various metrics suggest moderate overvaluation. - Household sector: - Household sector leverage is generally low. - Household debt service remained high, pointing to growing vulnerabilities. ### Policy Implications and Recommendations - Authorities have introduced the legal framework to set BBMs, enabling activation of income- and collateral-based measures. - BBMs are estimated to enhance household resilience and increase bank resilience over time, with stronger effects related to DSTI caps compared to LTV caps. - Implementation approach: - Caps could initially be set at less binding levels and gradually tightened over time. - Calibration considerations: - Use of complementary CBMs in mature cycles to bolster lender resilience. - Targeted exceptions (e.g., for young households) and phased implementation to mitigate distributional and access concerns. *Source: IMF Selected Issues Paper — Macroprudential Policy Calibration for Greece: Simulations for Borrower-Based Measures (Conclusions and Policy Implications).* ### Conclusions and Policy Implications ___________________________________________ 12 ### Conclusions and Policy Implications ### Introduction and Rationale for BBMs - The Greek financial system has remained resilient, supported by strengthening banks’ balance sheets, but faces significant challenges including the re-emergence of imbalances in the real estate market. - The Bank of Greece (BoG) has introduced a legal framework enabling borrower-based measures (BBMs), allowing activation of income- and collateral-based measures in the near term. - Simulations using a quantitative framework combining micro- and macro-level data show BBMs can enhance household resilience and, jointly (DSTI and LTV caps), lead to a more resilient banking system over time. - Recommendation: Caps could initially be set at less binding levels and be gradually tightened based on systemic risk assessment. ### Select Systemic Risk Assessment - Residential real estate prices: - Increased by more than 50 percent in nominal terms since the 2017 trough. - Increased by 35 percent in real terms since the 2017 trough. - Price-to-income ratio exceeded historical long-term average by 6 percent in 2023. - Price-to-rent ratio exceeded historical long-term average by 29 percent in 2023. - An econometric model suggests a price overvaluation of 8 percent in 2023. - Demand drivers include strong employment and real disposable income growth and increased nonresident investment (e.g., Golden Visa program). - Supply response: housing investment as a share of GDP and building permits doubled since 2016 (from a low base). - Household sector and bank exposures: - Household sector leverage and banking exposure to the real estate sector have declined since the sovereign debt crisis. - Household debt service remained one of the highest in the EU (housing costs in disposable income and the debt service ratio). - Some increase in the debt service-to-income (DSTI) ratio (BoG, 2023b). - Greece recorded the highest share of loan-to-value (LTV) ratio exceeding 80 percent among the EU countries (EBA, 2022). - Based on BoG data, the share of new loan disbursements with an LTV>80% stood at 5.7% in Q2 2023. - Overall bank exposure to real estate is below the EU average and less than pre-GFC levels. ### Macroprudential Policy Options: Instruments, Trade-offs, and Timing - BoG legal framework (amended in 2023) allows BBMs for financial institutions operating in Greece, covering credit secured by real estate located in Greece; BoG may set types of BBMs, affected credit types, cap percentages, and implementation conditions. - Core BBM instruments: - Income-based: Caps on DSTI to limit debt repayment burden and reduce probability of default (PD). - Collateral-based: Caps on LTV to reduce loss given default (LGD) and limit unsecured loan portions. - Complementary measures: maturity limits, loan amortization, risk weights, targeted capital-based measures (CBMs). - Trade-offs: - BBM caps balance risk mitigation (excluding/reducing riskier loans) against costs to credit intermediation and access for lower-income borrowers. - Evidence: BBMs contain house prices but can adversely impact credit and GDP (panel VAR and cross-country studies cited). - Distributional effects appear limited in some studies. - Timing and calibration: - Early activation in real estate cycle can address vulnerabilities while they are building up. - In more mature cycles, combining BBMs and CBMs can enhance both borrower and lender resilience. - Calibration may be binding or nonbinding depending on lending standards and objectives; static or dynamic over the cycle. - Speed limits and exceptions can target segments (e.g., young households); exceptions may allow a fraction of new lending to exceed limits for lower-risk borrowers. ### Implementation in the EU Context - BBMs are widely implemented in the EU: - DSTI caps implemented in 14 countries. - LTV caps implemented in 20 countries. - Greece is among the few EU countries without BBMs prior to the 2023 legal change, unlike Cyprus, Ireland, and Portugal which implemented BBMs earlier. ### Policy Calibration Framework and Methodology - Framework combines micro-level HFCS household data for Greece with macro-level quarterly data from the ECB and national sources. - Model outputs: - Individual households’ simulated PDs, LGDs, and loss rates (LRs). - Mapping of household risk parameters to bank mortgage portfolios to assess capital impact. - The framework accounts for macro-financial feedback from policies via reduced credit demand. - First-round effects: direct impact of BBMs on PDs, LGDs, and LRs. - Second-round effects: additional impacts from negative loan demand shocks on PDs, LGDs, and LRs. - Final step: computes impact on banks’ capital adequacy ratios via reduced loan losses and lower risk weights. ### Impact on Household Resilience (Simulation Findings) - DSTI vs LTV effects: - PDs decline sharply from a DSTI cap at around 90 percent, with a sizeable impact at 50 percent and maximal impact at the left end of the DSTI cap range. - LTV caps have a smaller estimated impact on PDs compared to DSTI caps. - LTV caps significantly reduce LGDs, with LGDs declining sharply from an LTV cap at around 90 percent. - DSTI caps do not significantly affect LGDs. - Crowding out and mortgage volume: - Mortgages reduced due to caps imply a stronger impact of LTV caps on crowding out compared to loss-rate-equivalent DSTI caps. - For a smaller share of the population, DSTI caps would be binding to achieve the same loss rate reduction as the corresponding LTV cap. - Mapping example: - An LTV cap at 85 percent maps approximately to an equivalent DSTI cap of around 40 percent. - Policy implication: - DSTI caps are more potent in reducing PDs. - LTV caps are more effective at reducing LGDs. - Joint implementation yields synergies enhancing borrower resilience to income and interest-rate shocks, and reduces portfolio loss rates (PDs and LGDs), improving bank resilience over the medium term. *Source: IMF Selected Issues Paper — Macroprudential Policy Calibration for Greece: Simulations for Borrower-Based Measures (Conclusions and Policy Implications).* ### 15. BBMs are estimated to enhance household resilience, with stronger effects for the ### 15. BBMs are estimated to enhance household resilience, with stronger effects for the ### Impact of DSTI and LTV Caps on Household Resilience - Calibration used: DSTI = 40 percent and LTV = 85 percent. - Joint implementation of DSTI and LTV caps increases borrower resilience more than individual caps. - DSTI caps: - Lower PDs more compared to LTV caps. - Have stronger overall impact on Loss Rates (LRs) compared to LTV caps. - Come at a cost of lower lending. - LTV caps: - Reduce LGDs more than DSTI caps. - Complementarities: - Income-based measures (DSTI) act primarily via the PD channel. - Collateral-based measures (LTV) act primarily via the LGD channel. - Joint effects align with evidence from Gross and Poblacion (2017). - Second-round effects: - Overall impact in terms of LRs is sizeable and higher for DSTI compared to LTV, with only relatively limited second-round effects when taking into account a negative loan demand shock. - Alternative calibration reported: DSTI = 45 percent and LTV = 90 percent (results presented in Appendix 2). ### Impact on Bank Resilience - BBMs have a positive impact on bank capital, measured by CET1 ratios. - Effect is stronger for DSTI caps compared to LTV caps. - Estimated impact is relatively sizeable despite reflecting only the mortgage loan portfolio. - Decomposition: - Reduced loan losses from the mortgage credit portfolio outweigh the lower risk weights owing to lower PDs and LGDs. - Figures referenced: Figure 6 (Impact on Households) and Figure 7 (Impact on Bank Capital) based on HFCS and IMF staff calculations. ### Macro-financial context and vulnerabilities - Historical context: - Greece experienced a protracted distress period involving substantial household deleveraging and a real estate market correction. - House prices have increased significantly since its trough in 2017. - Drivers of recent house price increases: - Strong employment and real disposable income growth. - Demand from nonresidents. - Lingering structural imbalances in the real estate sector. - Supply and valuation: - There was a significant supply response, but various metrics suggest moderate overvaluation. - Household sector: - Household sector leverage is generally low. - Household debt service remained high, pointing to growing vulnerabilities. ### Policy implications and recommendations - Authorities have introduced the legal framework to set BBMs, enabling activation of income- and collateral-based measures. - BBMs are estimated to enhance household resilience and increase bank resilience over time, with stronger effects related to DSTI caps compared to LTV caps. - Implementation approach: - Caps could initially be set at less binding levels and gradually tightened over time. *Source: IMF Selected Issues Papers — Macroprudential Policy Calibration for Greece: Simulations for Borrower-Based Measures (excerpts from chapter/section 15 and related appendices and conclusions).* --- _Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2024/english/sipea2024008.pdf_