Loan-to-value policy and the loan portfolios of commercial banks: theory and evidence from China

This study investigates the impacts of macro-prudential policies in real estate sector on commercial banks’ loan portfolios theoretically and empirically. Taking China’s Loan-to-Value (LTV) policy as an example, we show that a stringent LTV policy reduces residential mortgage loans and diminish their share in total loans, but such impact is related to previous housing price growth and LTV policy’s direction. Moreover, LTV policy also affects the loans to other sectors, with the extent of impact being contingent on the industrial linkage between these sectors and the residential housing sector. The paper contributes to understand the impacts of macro-prudential policies on bank loan portfolios choice and have certain implications for policy decision-makers.