IMF issues FSAP technical note on calibration of a Debt-Service-to-Income limit in Romania

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In a recent document released on June 8, the Financial Sector Assessment Program (FSAP), technical note, the International Monetary Fund (IMF) draws attention to vulnerabilities and the need to redesign the macroprudential tools.

The recent pick-up in household credit in Romania has given rise to a need for revisiting the design of existing macroprudential tools addressing household vulnerabilities. After a period of contraction followed by lackluster growth in the aftermath of the financial crisis, household credit growth has risen rapidly starting in 2016. This trend has strengthened the need to revisit the design of macroprudential tools aimed at constraining excessive household borrowing, and in particular the existing stressed Debt Service to Income (DSTI) limit applicable to consumer loans, the document reads.

“The National Bank of Romania (NBR) is considering a redesign of its existing macroprudential tool related to household indebtedness, including expanding its scope to cover all household loans. Against the backdrop of rising vulnerabilities associated with household indebtedness, the NBR is considering a recalibration of the existing DSTI limit. Specifically, it proposes: introducing an explicit maximum DSTI limit which applies to the stressed DSTI level (after imposing shocks on interest rate, FX and income), rather than relying on banks’ internal limits; expanding the scope of the tool to cover all household loans (consumer and mortgage loans, including Prima Casa loans); and recalibration of the shocks for calculation of stressed DSTI applicable to consumer loans and introducing similar shocks applicable to mortgage loans.

The analysis presented in this paper suggests that a stressed DSTI limit of 50 percent is the appropriate level for household loans. The analysis of loan-level data from the Central Credit Register suggests that the probability of default (PD) of a borrower is highly sensitive to any changes in DSTI at DSTI ratios around 50 percent, particularly for mortgage loans. Therefore, it is recommended to set the limit such that loans do not exceed this sensitivity threshold.

The impact analysis shows that imposing a 50 percent DSTI limit would lead to lower NPL ratios, while the impact on loan volumes would be limited. The analysis suggests that three-year ahead NPL ratios will be lower by 0.3 to 0.4 percentage points for mortgages and consumers, respectively, while (aggregate) loan levels would be 7–11 percent lower, depending on the share of loans that are exempted from the DSTI limit,” the document reads.


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