Debt-service ratio limits have greatest welfare benefit – BoE research

Bank of England
Photo: Juno Snowdon Photography

Research published by the Bank of England finds limits on debt-service ratios (DSRs) have the greatest welfare benefit among macro-prudential tools.

Stephen Millard, Margarita Rubio and Alexandra Varadi build a dynamic stochastic general equilibrium model augmented with financial frictions. The model also includes leverage limits on banks, loan-to-value (LTV) limits and DSR limits.

The authors find imposing capital requirements can “nullify” the effect of financial frictions, closing spreads

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