Page 269 - Special Topic Session (STS) - Volume 3

STS543 Muizz A. et al.
Macroprudential policies have been used in Malaysia to address systemic
1
risk to the financial system since the early 1990s . In the recent decade, the
Government and the Central Bank of Malaysia (the Bank) implemented a series
of measures to address excessive accumulation of household debt and to
promote a more sustainable housing market. Since the implementation of
these measures, credit-fuelled speculative purchases of residential properties
(measured by the annual growth of the number of borrowers with three or
more residential property loans) declined to 1.7% as at end-2018 (2010: 15.8%
(peak)). Personal financing, which also drove the earlier rapid debt
accumulation by households, moderated significantly to 2.3% as at end-2018
(2008: 25.2% (peak)). Against this backdrop, the household debt-to-GDP ratio
declined to 82.1% (2015: 86.9% (peak)). More importantly, this decline
occurred without adversely affecting private consumption and economic
growth.
Two notable studies assessing the effectiveness of macroprudential
policies in Malaysia against the objective that they were designed to achieve,
found supportive evidences. Rauf (2017) found that introduction of additional
policies is associated with a decline in growth of residential property loans. Of
significance, policies affecting the supply and demand of credit are found to
be more effective vis-à-vis fiscal policies that affect the cost of
homeownership. Similarly, A. Rani and Lau (forthcoming) found that a limit on
loan-to-value (LTV) ratio did dampen demand for residential property loans
although the effects appear to diminish over time. Both studies measured the
effectiveness of macroprudential policies at the bank- and banking system-
level, respectively.
Our study extends existing work, by assessing the impact of
2
macroprudential policies on the debt service ratio (DSR) of households, at the
borrower-level. The paper is organised as follows: in Section 2, we will provide
an overview of the Malaysian household debt over the years and the
macroprudential policy framework in Malaysia; in Section 3, we describe the
data and methodology used; in Section 4, we present our results; while in
Section 5, we draw some conclusions and outline possible policy implications
of our work.

A series of macroprudential policies were implemented to curb large capital inflows that led
1
to a strong growth in assets prices, which includes, among others, a cap on LTV ratio and a
limit on the expansion of bank financing to less productive economic sectors.
2 The ratio of total monthly bank and non-bank debt obligations to monthly disposable
income (net of statutory deductions).

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