N° 13 : Do LTV and DSTI caps make banks more resilient?

Using a lender’s risk management perspective, the paper provides a new methodology extending the standard asymptotic single risk factor to a multifactor framework, the additional factors being linked to LTV or DSTI tranches. On the basis of a unique database containing 850 896 individual housing loans, the results demonstrate the efficiency of credit standards which constrain the households’ indebtedness. On average, credit risk tends to grow in line with the increase of LTV and DSTI tranches. But our findings show also that the relationship between risk and the LTV/DSTI ratios is not monotonic. Portfolio credit risk culminates in tranches close to the 100% LTV and the 35% DSTI thresholds. It is more the combination of LTV and DSTI ratios than the use of each ratio separately that help to maintain the total portfolio credit risk under check.