Economics and management of enterprises

The loan-to-value ratio as a macroprudential tool and assessment of real estate in the post-crisis period

Economic Annals-XXI

Economic Annals-ХХI: Volume 185, Issue 9-10, Pages: 119-132

Citation information:
Pisarska, A., & Wasilewska, N. (2020). The loan-to-value ratio as a macroprudential tool and assessment of real estate in the post-crisis period. Economic Annals-XXI, 185(9-10), 119-132. doi: https://doi.org/10.21003/ea.V185-12

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Aleksandra Pisarska
PhD (Economics),
Chancellor,
Jan Kochanowski University of Kielce
5 Żeromskiego Str., Kielce, 25369, Poland
apisarska@ujk.edu.pl
ORCID ID: https://orcid.org/0000-0002-8165-0691

Natalia Wasilewska
D.Sc. (Economics),
Professor,
Dean, Branch in Piotrkow Trybunalski,
Jan Kochanowski University of Kielce
5 Żeromskiego Str., Kielce, 25369, Poland
nwasilewska@ujk.edu.pl
ORCID ID: http://orcid.org/0000-0001-8638-4735

The loan-to-value ratio as a macroprudential tool and assessment of real estate in the post-crisis period

Abstract. For more than a decade, banking systems of many countries around the world have been trying to recover from the effects of the global financial crisis. The dynamics of one of the most important indicators of the effective operation of the banking sector – the level of fulfilment of loan obligations by the debtor – is analysed in the present paper. A nonperforming loan ratio (NPL) more than doubled in the EU in the period from 2008 until 2012, and the value of this indicator increased more than 20 times in the period from 2008 until 2017 in Ukraine.

Many countries worldwide have focused on activities that aim at minimizing the risks associated with lending. The experience of more than 4,000 banks in 46 countries shows that one of the most effective macroprudential tools used by European central banks for mortgage loans is the loan-to-value ratio (LTV). According to research, central banks have recommended lowering the level of LTV. Thus, in Poland, the loan-to-value ratio used to be 100% and even higher, but from 2017 the maximum level should not exceed 80%. In China, the LTV level has dropped to 40% for the secondary real estate market. In Germany, the maximum loan-to-value ratio is 80%, and mortgages with LTV of less than 60% are financed at more favourable conditions by banks. Using macroprudential policy has made it possible to stabilize the situation in the banking system, therefore in 2020 the average level of non-performing loans in the EU decreased to 2.8%. In Poland, the level of NPL is slightly higher and is 6.2%, however in Ukraine the figure remains high and reaches 41%.

This study aims to identify the dependence between the adequacy of fulfilment of the collateral and the debtor’s loan obligations, which is extremely important in order to stabilize and increase the liquidity and profitability of banking institutions. The obtained results are based on the assessment of 200 loan cases for which the execution time has come.

Keywords: Loan-to-Value (LTV); Nonperforming Loan (NPL); Macroprudential Instruments; Creditworthiness; Enterprise; Assessment of Real Estate; Mortgage; Lending; Liquidity; Profitability

JEL Classification: G21; G32; R30

Acknowledgements and Funding: This paper follows the projects of the Internal Grant of the Jan Kochanowski University in Kielce, Department of Economics and Finance «Financing and management of public sector entities» and «Determinants of dependence between the sources of financing and the effectiveness of business units».

Contribution: The authors contributed equally to this work.

DOI: https://doi.org/10.21003/ea.V185-12

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Received 22.08.2020
Received in revised form 21.09.2020
Accepted 26.09.2020
Available online 21.11.2020
Updated version of the paper as of 27.12.2020

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