IMF Working Papers

Micro-Assessment of Macroprudential Borrower-Based Measures in Lithuania

Author/Editor:

Mantas Dirma ; Jaunius Karmelavičius

Publication Date:

October 27, 2023

Electronic Access:

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Summary:

Despite having introduced borrower-based measures (BBM), Lithuania's housing and mortgage markets were booming during the low-interest-rate period, casting doubt on the macroprudential toolkit's ability to contain excessive mortgage growth. This paper assesses the adequacy of BBMs’ parametrization in Lithuania. We do so by building a novel lifetime expected credit loss framework that is founded on actual loan-level default and household income data. We show that the BBM package effectively contains mortgage credit risk and that housing loans are more resilient to stress than in the preregulatory era. Our BBM limit calibration exercise reveals that (1) in the low-rate environment, income-based measures could have been tighter; and (2) borrowers taking out secondary mortgages rightly are and should be required to pledge a higher down payment.

Series:

Working Paper No. 2023/227

Subject:

Credit risk Financial institutions Financial regulation and supervision Financial sector policy and analysis Housing prices Loans Macroprudential policy instruments Mortgages Prices

Frequency:

regular