36 Dealing with the magnitude of financial cycles or bubble dynamics that economies typically face from time to time requires some absolute prudential limits. In Singapore, we have employed the following limits on property loans: •  Loan tenure cap of 35 years. BIS central bankers’ speeches  5  •  Loan-to-value ratios of 80%, 50%, and 40% for the first, second, and third property loans respectively, for tenures less than 30 years; for loan tenures more than 30 years, the loan-to-value ratios are 60%, 30%, and 20%. •  Total debt-service ratio of 60%, taking into account all debt obligations and using a medium-term interest rate of 3.5% for residential properties. (Current mortgage rates are generally below 2%.) •  Cap on banks’ property-related exposures at 35% of their total exposures. 37 In fact, macroprudential policies need not even be limited to prudential tools at the disposal of central banks or financial regulators. In the face of abundant global liquidity, credit-based prudential measures may not constrain loan growth or asset price increases sufficiently. Singapore has therefore also adopted fiscal measures such as stamp duties on buyers and sellers of properties as part of the macroprudential toolkit. •  The seller’s stamp duty ranges from 4% to 16%, while the buyer’s stamp duty ranges from 3% to 18%. •  These are essentially transactions taxes that aim to curb the speculative flipping of properties. 38 Third, it is important to draw a distinction between macroprudential policies and capital flow management measures.
4  BIS central bankers’ speeches  •  During a property boom, compared to interest rates, expectations of price appreciation may have a greater influence on current prices. •  Kenneth Kuttner and Illhyock Shim estimate that a 100 basis point increase in the short-term interest rate would lower real annualised credit growth by less than 1 percentage point in the following quarter. Such a rate hike will also reduce real housing price growth by only 1 percentage point. •  Using monetary policy to prick a property bubble may therefore require very sharp increases in interest rates to be effective. But this may have unintended spillovers on other parts of the economy. Macroprudential policy: targeting the cracks 30 This brings us to the third approach to securing financial stability: using macroprudential policy, while monetary policy continues to focus on price and output stability. Macro-prudential policies can be more effective for “targeting the cracks” where specific vulnerabilities are concentrated. 31 But what exactly are macroprudential policies? Given its recent rise to prominence, it is still a nebulous concept with differing definitions. Let me offer my thoughts on what macroprudential policy is and what it is not, from the perspective of Singapore, which has been an early experimenter and practitioner in this area. 32 First, it is closely related to yet distinct from microprudential policy. Some have called macroprudential policy “old wine in new bottles”. Yes and no.