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Assessing the effectiveness of the Portuguese borrower-based measure in the Covid-19 context

Autores 
Ângelo Ramos
Vítor Oliveira
Katja Neugebauer
Ano de Divulgação 
2021
Código JEL 
G01 - Financial Crises
G21 - Banks; Other Depository Institutions; Mortgages
G51 - Household Saving, Borrowing, Debt, and Wealth‡
Resumo 
Based on the macroeconomic projections from Banco de Portugal and using an integrated micro-macro model developed by Gross and Población (2017), this paper makes a first attempt at gauging the impact of the Covid-19 pandemic on Portuguese households and banks. To this end, we examine how the borrower-based measure, which has been put into place in 2018, might have been successful in dampening the negative economic effects of the pandemic on households’ debt-servicing capacities and thereby onto the banking system. We find that the borrower-based measure, defined as an LTV ratio cap of 90%, a shocked DSTI ratio cap of 50%, and a maturity cap for mortgage loans of 40 years, leads to (i) a reduction in households’ loss rate (LR), caused by both a decrease in households’ probability of default (PD) and loss given default (LGD), and (ii) an increase in the capital ratio of the banking system, compared with a scenario where these limits are not in place. We also find positive effects of introducing a shocked DSTI ratio cap, calculated according to the Portuguese borrower-based measure, as it further (i) decreases the risk parameters of the borrowers and (ii) increases the capital ratio of banks.
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