Trésor-Info - Publications de la direction générale du Trésor - Financial-Stability

The Consequences of Regulating Mortgage Lending Conditions

2025-04-08T00:00:00+02:00

An increase in household mortgage debt was the catalyst for the decision made by the macroprudential authority – the High Council for Financial Stability (HCSF) – to regulate mortgage lending conditions for households in France. In 2019, the HCSF published a recommendation for credit institutions to limit the debt service to income (DSTI) ratio – the share of income allocated to monthly mortgage repayments – and the maturity of the mortgages approved. This recommendation became legally binding in 2022.

The Primmo model was used to assess this regulation, taking into account the varying impact that government policies may have depending on actual observed interest rates. This assessment showed that the HCSF’s measure had enabled the average DSTI ratio to be reduced while increasing the average mortgage maturity. However, the effect on property prices is limited amid rising interest rates. The findings are in line with the studies presented in the HCSF’s 2024 Annual Report.

When using the variation in the average income of buyers in the model as a proxy of the exclusion of households, the analysis reveals that lower-income households are “excluded” from the credit market due to high interest rates, but that this is not compounded by the HCSF measure.

If the HCSF had not applied the measure, the average DSTI ratio would have risen while the average mortgage maturity would have decreased. However, this would not have had a major effect on transactions and property prices within one year, as short-term market momentum is primarily influenced by the interest rate environment.

The model can also be used to examine the effect of exogenous shocks – relating to interest rates, as well as construction and rent – on the property market’s momentum and the profile of borrowers.

The Market for Safe Assets

2023-08-29T00:00:00+02:00

The holding of so-called “safe” assets, and the market for these securities more broadly, play a key role in maintaining financial stability. Yet there is no consensus as to how these assets are defined because the “safety” of a security depends on a number of different characteristics such as its stability, counter-cyclicality and liquidity, how transparently it is valued, and how solid its fundamentals are. The relative importance of these aspects varies according to investor preferences and financial-market conditions.

By examining how different asset classes perform against different safety criteria, it is possible to identify a universe of assets that can be considered “safe”, and to analyse developments in the market for these assets over the past two decades.

The supply of safe assets grew sharply in the 2010s, owing in part to sovereign bond issues. However, these assets became less readily available as central banks, especially in Europe, embarked on bond-buying programmes as part of a broader package of unconventional monetary policy measures. Despite increased supply, safe assets remained hard to come by throughout this period, as demand surged in both Europe and the United States, owing largely to the introduction of tighter prudential requirements in the wake of the 2008 financial crisis.

Globally, the market imbalance caused by these opposing forces has been partly redressed since the COVID-19 crisis of 2020, owing in large part to sovereign debt issues intended to fund pandemic support packages, which have had the effect of bringing the supply of safe assets into closer alignment with demand.

Looking ahead, the market could be affected by a number of major structural trends. Factors that could impact supply include the reshaping of the safe assets landscape amid the green transition, debt sustainability issues, rating downgrades and reform of the international monetary system. Meanwhile, demand could be influenced by developments such as the roll-back of unconventional monetary policy measures and changes to regulatory standards, especially those relating to non-bank financial institutions (NBFIs).

China's Public Finances: Short-Term Risks and Structural Issues

2023-05-23T00:00:00+02:00

Public finances have been a major driving force behind China’s growth, not least through public investment at the local level particularly since the 2008 crisis. In 2019, China’s public spending amounted to 24% of GDP according to official statistics, versus the 36% and 41% figures reported by the IMF and the OECD respectively.

Analysing China’s public finances is hindered by the lack of clarity in the definition of the prerogatives of various administrative levels (central, provincial, prefecture, county, city) in the Constitution of the People’s Republic of China and Chinese law, as well as by the fact that national laws often merely outline principles which are subsequently implemented at local level with significant leeway. The structure of public accounts is also based on opaque and complex methodology, lacking clarity on what spending falls within their scope, and the line between local and central government sometimes being blurred.

Public accounts structurally post a high level of deficit and debt. These two indicators have considerably worsened over the past few years, particularly as a result of the COVID-19 pandemic (see Chart). The situation at local level now emerges as a financial stability issue, with 57% of total government debt incurred at this level – according to official data – in a relatively
opaque way.

While local financial risks are high, a short-term systemic crisis seems unlikely given the guarantees granted by the central government and the fact that a large portion of the debt is held by major banks and local government entities.

Over the long term, imbalances and risks relating to public finances hamper growth and its necessary rebalancing, implying a shift from investments to domestic consumption. Despite the proactive stance of the authorities and the repeated recommendations of international observers, implementation of the reforms – a designated priority since 2013 – is still a slow and piecemeal process.