A number of studies have identified house price overvaluation and household debt as reliable predictors of a correction in the credit cycle.12 Next, we assess the current resilience of the financial system to a correction. To do this, we monitor banks’ lending portfolios, their capital positions, and undertake stress tests of banks.
Finally, we examine the feedback effect of the identified risk with the wider economy. The main indicator for this assessment is bank lending standards, which could undermine the resilience of the financial system over time, and increase vulnerabilities in the housing market and wider economy. After considering all this information, we can judge whether these risks fall into the purview of macroprudential policy.