Gediminas Šimkus: Speech at Macroprudential Policy Conference
2021
Opening remarks by Gediminas Šimkus, Chairman of the Board of the Bank of Lithuania, at the
Macroprudential Policy Conference "Borrower-based measures in times of global pandemic and
beyond", Vilnius, 4 October 2021.
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Good afternoon, Ladies and Gentlemen:
It is my pleasure to welcome you today to our macroprudential policy conference, albeit not in our
beautiful capital Vilnius, but in an already-traditional - virtual - format. I would like to thank you all
- speakers, panellists, and participants - for gathering to discuss this very timely topic - the role
of borrower-based measures in times of a global pandemic crisis.
I would also like to express special thanks to our keynote speaker Ms Sharon Donnery, Deputy
Governor of the Central Bank of Ireland, who will deliver her keynote speech tomorrow morning.
As this is already the 4th biennial Macroprudential Policy Conference organized by the Bank of
Lithuania, allow me to bring some interesting historical context for today's discussions.
When we started in 2015, we concentrated on the role and experience with credit flow
restrictions and the effectiveness of borrower-based measures. Two years later we came up
with a more controversial topic, "Should Macroprudential Policy Target Real Estate Prices?",
which ignited an interesting discussion. In 2019 the topic of "Real Estate Taxation and its
Possible Interlinkages with Macroprudential Policy" led to the conclusion that the effective
combination and coordination of real estate-related taxation and macroprudential policy should
receive more attention from policy makers.
The focus of the conference this year is once again on the housing market and emerging
postpandemic challenges. I would like to start my talk today with a quick overview of the topics we'll
discuss this afternoon. Then I will present our Lithuanian experience of dealing with housing
market fluctuations during the COVID-19 pandemic. I will conclude with an insight into the three
main challenges I see macroprudential policy facing in the future.
Dear Colleagues:
House prices are booming in almost every advanced economy as the impact of the coronavirus
pandemic was weathered better than initially expected, in part due to forceful monetary and fiscal
policy response to the pandemic.
It is hard to disagree with Claudio Borio, from the Bank for International Settlements, that in the
short term, house price growth can be "a good thing for the economy because people who
already own homes feel richer, and they can spend more due to the valuation of their assets".
But at the same time, we should be wary of house price growth turning into an unsustainable
boom.
It is obvious that we do not want another credit-fuelled housing price bubble, such as the one
which led to a very painful burst in 2008. To this end, a set of properly calibrated macroprudential
policy measures is the key to maintaining financial system resilience.
In welcoming you all today, I hardly need to list the benefits of macroprudential policy and its
instruments. It is widely acknowledged that by imposing additional regulatory requirements,
macroprudential policy can restrain lending to excessively risky borrowers, or create the
necessary buffers in financial institutions. In other words, it can help ensure that the financial
system serves the real economy - instead of hindering its activity or amplifying shocks.
Therefore, it is not at all surprising that after the Great Financial Crisis, macroprudential policy
gained relevance, becoming mainstream. In fact, Lithuania was one of the first countries to
introduce such measures back in 2011. We believe these measures were crucial for building
and maintaining sound lending practices. Nowadays, borrower-based measures are widely used
in the EU and throughout the world.
However, as we move into the post-pandemic "new normal", we should be very wary of the new
risks revealed by the COVID-19 crisis. We also need to carefully assess policies currently being
applied to understand if they are sufficiently effective in the new environment.
Therefore, I am very happy to have you all gathered here to discuss how borrower-based
measures should be adjusted in the light of recent developments.
The period of the COVID-19 pandemic was the "first test of the framework in a major economic
crisis". I think everyone agrees that the framework passed the test successfully; however, some
issues related to the framework's functioning in the medium term - namely, its efficiency and
transparency - have been revealed.
As the EU-level discussions on possible minimum harmonization of borrower-based measures
are currently ongoing, now is a perfect time to evaluate the role borrower-based measures
played during the pandemic.
We need to look further into what changes could be made to the macroprudential framework and
its application to make it more effective, fair, and fit for the world of tomorrow.
The European Commission is in the process of considering inclusion of borrower-based
measures into EU law by:
(i) introducing harmonised definitions;
(ii) enhancing the availability of data needed for their effective application;
(iii) introducing a minimum, harmonised borrower-based measure toolkit.
While the consultations are ongoing, today we have a unique opportunity to discuss various
experiences from a diverse set of countries, such as Czech Republic, Denmark, and New
Zealand.
I am especially excited to have from the Reserve Bank of New Zealand with us
Mr Duncan Mills
today. Mr Mills, I hope, will shed more light on the widely publicized decision to expand the
monetary policy mandate, which now includes the task of supporting more sustainable house
prices.
In the euro area, housing prices are not part of the monetary policy targets, as residential
property price changes are not included in the Harmonised Index of Consumer Prices (HICP) -
the most appropriate measure for assessing price stability. In the recent strategy review of the
European Central Bank, we recognized the need to include the costs related to owner-occupied
housing in the HICP to better represent the inflation relevant to households.
To date, the best tools we have in addressing the risks arising from housing market instabilities
fall under the macroprudential framework. A central question we policy makers face today is how
to respond to fluctuations in the housing credit market. Should we calibrate our borrower-based
measures with the aim to increase or decrease mortgage lending depending on where we are in
the credit cycle?
Ladies and Gentlemen:
I would now like to take an opportunity to share some insights about how the COVID-19
pandemic affected the Lithuanian housing market and how possible changes to the
borrowerbased measures here became a rather heated topic.
When the first country-wide lockdown was imposed in the beginning of 2020, the Lithuanian
housing market froze - transaction numbers plummeted, and the flow of housing credit
diminished. This caused a lot of concern and sparked discussions on the need to loosen
borrower-based measures to increase activity in the market.
At that time, we allowed credit providers some flexibility when assessing the creditworthiness of
individuals experiencing a temporary income drop during the lockdown. We basically chose a
wait-and-see approach regarding more substantial changes to the borrower-based measures.
It turned out that we were not wrong in giving the market a minute to sort itself out. Only a few
months later, buyers returned to the market with increased savings and craving newer, better,
bigger housing.
Months spent in lockdowns forced many households to reconsider their housing needs. When
faced with a new reality of working from home, many found themselves in need of a dedicated
room for a home office. Properties in less central, but quieter, greener locations gained
attractiveness in the absence of a daily commute.
At the same time, many households, particularly those that were already wealthier, accumulated
savings, as lockdowns limited spending while their jobs remained in demand and salaries
increased.
A combination of increased resources, accommodating financing conditions, and a shift in
preference towards more spacious and comfortable housing, sharply pushed demand for
residential properties.
As we can see in the graph here on the left-hand side, after a sharp drop in transaction numbers
in March-June 2020, housing market activity in Lithuania rapidly recovered, and soon surpassed
pre-pandemic transaction numbers.
Again, the market slowed down during the period of a second nation-wide lockdown at the end of
2020, but this dip in market activity was neither as deep nor as prolonged as that at the onset of
the pandemic.
With demand for housing high and supply limited - given that acquiring suitable land, obtaining
building permits, and ensuring building supplies and builders themselves takes time - housing
price growth in Lithuania picked up, reaching 13.3 % in Q2 of 2021 - the most rapid increase
since early 2008.
At the same time, as you can see in the graph on the right-hand side, the share of lenders'
portfolio allocated to mortgages continued to increase, with the pace picking up visibly in the
recent months.
And now, only a year after intense discussions on possible loosening of borrower-based
measures, we are considering tightening them.
After a thorough micro-data analysis and econometrical modelling, we have concluded that there
is a need to target a riskier segment of the housing market - those acquiring second or
subsequent loans for housing purchases.
During the pandemic in Lithuania, the share of loans to borrowers who already have a mortgage
increased, as illustrated by a graph on this slide. The share of non-primary mortgages
particularly increased for housing located in our lovely capital city Vilnius and the recreational
seaside region - from roughly a tenth to 16% of the total mortgage flow, pointing to possibly
speculative housing purchases with credit.
To tame such behaviour, we have decided to impose a stricter loan-to-value (LTV) requirement
for all second or subsequent mortgages, except to those borrowers whose primary loans are
significantly amortized.
In addition to this, we plan to introduce a sectoral systemic risk buffer requirement to banks and
credit union groups operating in Lithuania, applicable to their overall mortgage portfolio. This
sectoral systemic risk buffer would contribute to financial sector resilience to housing market
turbulence.
The official decisions will be made after ongoing consultations with market participants, the ECB,
and other authorities. These measures will come into force next year.
At the same time, to discipline speculative tendencies in the housing market in general, our
government is considering revising its real estate taxation policy. Proposals currently focus on
increasing taxation for those owning multiple residential properties, rather than on taxing
properties only in situations where property value exceeds a certain threshold.
If implemented, such fiscal policy measures, in combination to the intended changes in the
borrower-based instruments, would have a powerful impact in cooling the currently heated
housing market. If fiscal and macroprudential policy work together, they have the potential to
achieve maximum impact.
But let me return to the status quo.
The currently binding framework for housing loans in Lithuania is nicely summarized in this slide.
We have an LTV limit of 85%, DSTI of 40%, and maximum mortgage maturity of 30 years. This
framework helped in creating a level playing field for mortgage lenders and propagated more
prudent lending and borrowing practices since 2011.
The world today, however, is not as it was in 2011. Therefore, we gather here not only to share
our experiences and views on current borrower-based measures, but also to look ahead and
consider possible enhancements to the use of macroprudential instruments in the future.
Dear Colleagues:
I see three main challenges we must consider when revising the macroprudential policy
framework. First, we need to consider the effectiveness of macroprudential instruments to tackle
systemic risks arising from the low interest rate environment. Second, we need to think how to
minimize distributional consequences of the borrower-based instruments. And third, we need to
investigate to what extent macroprudential instruments can mitigate climate change risks.
Regarding the first challenge, no EU Member State so far has explicitly used macroprudential
instruments motivated by systemic risks related to the low interest rate environment.
This is partly because the current macroprudential framework and the available macroprudential
instruments do not facilitate efficient mitigation of such risks as low profitability and the resulting
search-for-yield behaviour.
Borrower-based instruments are currently available only for lending to households, not for lending
to non-financial corporates. In the few countries that have developed borrower-based measures
targeting lending to corporates, they apply exclusively in relation to commercial real estate
transactions.
In addition, borrower-based instruments often do not cover all lenders, including non-bank
financial institutions. However, while we all mostly agree that we should expand macroprudential
instruments to cover all lenders beyond the banking sector, opinions differ regarding whether
borrower-based measures should be applied to lending to firms.
As I mentioned before, the European Commission is currently considering the need to expand
applicability of borrower-based measures to include lending to firms. It is therefore very timely
that in the policy panel tomorrow we will have an opportunity to seek further insights on this
issue.
The second challenge we must consider is the widening inequality of households' income and
wealth. Borrower-based measures have distributional effects and may potentially impact wealth
inequality, given that, depending on the design, borrower-based instruments may limit
possibilities to own housing for certain groups of individuals.
In our discussions tomorrow we will share opinions on how the framework of borrower-based
measures can be calibrated or augmented to minimize this undesirable side effect. An effective
combination and coordination of real estate related taxation and macroprudential policy is
necessary to ensure that the limitations to homeownership are as closely related to the riskiness
of individuals as possible.
Finally, climate change risks are very real, and their importance increases each day.
Macroprudential policy measures have the potential to mitigate climate change related risks to
financial stability and to contribute to "greening" the stock of available housing.
By differentiating borrower-based measures according to some characteristics of the housing
unit - for example, more stringent LTV requirements for loans secured by old,
low-energyperformance housing units, or for units at increased risk of flooding from rising sea levels areas -
we could impact the attractiveness of such housing types and their affordability. There is no
better time than the present to consider whether we should introduce such changes.
I also strongly believe that now is the time to discuss whether macroprudential policymakers are
prepared and whether they have the necessary tools to mitigate climate-related risks to financial
stability. It is worth noting that we still lack clear evidence on the degree to which the
macroprudential measures address these risks, especially when interactions with other policy
areas are accounted for.
To wrap up, this is the fourth macroprudential conference, and I am glad to see that the agenda
is filled with interesting sessions with speakers from many different institutions.
I wish us a fruitful exchange of views, hopefully leading to constructive policy outcomes. And now
I'm excited to open the floor to these highly needed and well-targeted discussions.
More: www.lb.lt/en/speeches-interviews-presentations/speech-by-gediminas-simkus-at-
macroprudential-policy-conference-2021