Lana Ivičić, Chief Advisor at the CNB's Macroprudential Policy and Financial Stability Department, presented today at the 77th Economic Workshop of the Croatian National Bank her forthcoming paper "Borrower-based measures in macroprudential policy".

The paper argues that borrower-based measures are a key macroprudential policy tool to limit excessive household borrowing and mitigate the build-up of systemic risks associated with the credit cycle. Empirical research confirms that excessive growth in household debt raises the probability of bank crises as it increases household sensitivity to changes in macroeconomic conditions. Borrower-based measures directly limit the amount of credit that credit institutions may grant, depending on borrowers’ income, the value of the pledged property, or the duration of the credit relationship; their use has become increasingly widespread after the global financial crisis. They are most often used to mitigate systemic risks associated with household loans and the real estate market.

The role of these measures in safeguarding financial stability is twofold: they directly reduce the risks associated with excessive credit growth by limiting access to new lending to certain categories of debtors and they indirectly bolster resilience of households and credit institutions to negative shocks. In practice, they are increasingly introduced as a permanent structural element of the macroprudential framework and not only as a counter-cyclical tool.

Research on the effectiveness of these measures shows that they have clear and measurable effects on financial stability, especially when applied in combination with other measures. On the other hand, their impact on the real estate market remains doubtful, notwithstanding the fact that some research found that they may slow down price growth in the medium term. Some research noted possible negative effects on economic growth and inequalities, depending on the calibration of measures and the phase of the financial cycle. However, in the medium term, such costs are largely offset by a reduced growth risk.

"The experience of many countries and previous research results confirm the effectiveness of borrower-based measures in limiting credit expansion and reducing systemic risks, especially in the upward phase of the financial cycle. Therefore, their application should be primarily precautionary and aimed at preventing excessive build-up of risks during expansion. While these measures may carry some social and economic costs, they can be reduced through the timely application and careful calibration of the measures, thus striking a balance between preserving financial stability and securing available funding", Lana Ivičić concluded.