How Borrower-Based Macroprudential Measures Shaped EU Banks Over a Decade

The European Central Bank published its latest Macroprudential Bulletin on June 25, 2025. The publication included a thorough overview of borrower-based macroprudential measures that have been implemented in the European Union banking union over the past ten years. These tools were intended to bolster financial stability by addressing household borrowing practices, and as such have become germane to diminishing systemic risk. While capital-based limits typically regard overall quantity and quality of reserve and buffer requirements of banks, borrower-based tools remain at the individual level defining how much people can borrow and how to structure loans.

The decision to move regulatory emphasis in this direction wasn’t random. As household debt, property prices, and credit distortions grew, and threatening increased financial instability, regulators needed to add a more nuanced, timely supervisory framework. Loan-to-value and debt-service-to-income caps were introduced in an effort to shed any excess lending environment before it turned into financial instability at large. As importantly, the multitude of jurisdictions employing borrower-based measures throughout the banking union has transformed the manner of financial risk management from reactive to proactive.

Understanding Borrower-Based Macroprudential Measures

Borrower-based macroprudential measures are meant to contain the build-up of risk at the borrower level. Instead of addressing capital or liquidity issues at the institution level, these tools will restrict how much debt a borrower can reasonably take on. Borrower-based measures’ common tools include loan to value (LTV) limits (which restrict borrowing based on property value) and debt-service to income (DSTI) limits (which restrict the extent to which borrower income can be used for debt repayments). Both LTV and DSTI help reduce credit risk by limiting exposure to volatile real estate markets and preventing the systemic problem of over-indebtedness.

In addition to being able to address the risk to the borrower, borrower-based measures introduce a cross-national dimension of macroprudential regulation in the banking union. They will establish the same borrower limits across countries – they help to diminish systemic vulnerabilities and provide a uniform level of risk reduction when the risks fall within national borders. Borrower-based measures have been experimented with and refined over the last decade and are increasingly being entrenched into the financial rulebooks of the member states in the EU.

Timeline of Implementation Across the Banking Union

It was not until around 2015 that barrrower-based macro-prudential measures were introduced in earnest as housing markets started showing signs of unsustainable growth in several EU countries. Ireland and Sweden first implemented LTV limits and acted on concerns that the property sector was overheated. As more countries started to realise the risks of fast-expanding credit, the policy response evolved to expand the range of borrower-based measures.

Between 2018 and 2020, countries like Portugal and Slovakia also placed debt-service-to-income limits. This would engage and add further limitation in any potential excessive borrowing. The new regulation period from 2021-2024, was largely one of refining and standardising, with many member states refining thresholds and reforming frameworks as per the ECB toolkit. This also helps provide a more cohesive and systematic supervisory and governance landscape in the banking union, with improved risk management and market discipline.

The Impact on Financial Stability and Credit Risk

The adoption of borrower-based macroprudential measures has had a measurable and positive impact on financial stability in the EU. Household credit growth moderated in a number of jurisdictions following the introduction of these measures. It appears that caps successfully curtailed risky borrowing behavior and lowered the overall credit risk to banks, given they were less exposed to vulnerable borrowers and defaults. In a number of jurisdictions, the quality of bank loan portfolios improved. Non-performing loan ratios decreased and organisations were better able to absorb shocks from interest rate hikes and economic downturns. 

Furthermore, property markets appeared to have stabilised in those areas where previous excessive increases in property prices were moderated, indicating that these tools helped control housing cycles. Within the banking union, it is important to note that these improved outcomes arose not only from the specific measures implemented, but also from the benefits of using a collaborative approach and continuous review of overall policy stance.

Challenges and Lessons Learned from the Past Decade

Even with a successful record, borrower-based macroprudential measures faced numerous practical and structural barriers. A key issue was the potential for regulatory arbitrage when borrowers or lenders sought jurisdictions with less strict lending standards, which may have inadvertently circumvented restrictions. This process highlighted the necessity of stronger policy coordination and better alignment of rules across all EU countries. Another important obstacle was data. 

Weak or incomplete borrower-level data limited regulators’ ability to monitor their institutions’ risk exposures and calibrate the measures. This made it difficult for some countries to set the right thresholds for LTVs or DSTIs and they had to go through several iterations to get it right. These experiences exemplify the importance of a good data infrastructure, a transparent process for evaluating policies, and consistent engagement between national and EU authorities to ensure that borrower-based measures can remain dynamic and relevant.

What the Future Holds for Borrower-Based Policies

In the future, borrower-based macroprudential interventions are likely to develop along with the development of data analytics and digital finance. Improved access to information on borrowers will enable near real-time tracking of financial behavior, giving regulators a chance to react more rapidly to new challenges. The ECB also noted its desire to expand on tools like borrower-specific capital buffers, which would complement existing regulations and offer further resilience. The maturation of the banking union will likely lead to increased harmonization of these policies. 

Finite differences can have significant effects in cross-border situations, and some shared framework between the various policymakers to limit these differences would increase the efficiency of supervision overall. Furthermore, over the last decade, the EU’s experiences may help contribute to its role as a global reference point for borrower-based macroprudential regulation. When properly designed and continually adjusted, these measures can be a strong line of defense against future credit crises.