EU Adopts Borrower-Based Measures to Enhance Financial Stability

The European Central Bank released its latest Macroprudential Bulletin on June 25, 2025, providing a comprehensive overview of borrower-based macroprudential measures implemented in the European Union banking union over the past decade. These measures were designed to enhance financial stability by addressing household borrowing practices, thereby reducing systemic risk. Unlike capital-based limits, which focus on the overall quantity and quality of reserve and buffer requirements for banks, borrower-based tools target individual borrowers, defining how much they can borrow and how loans should be structured.

The shift towards these regulatory measures was not arbitrary. As household debt, property prices, and credit distortions grew, posing threats to financial stability, regulators needed a more nuanced and timely supervisory framework. Loan-to-value (LTV) and debt-service-to-income (DSTI) caps were introduced to curb excessive lending before it led to broader financial instability. The widespread adoption of these measures across various jurisdictions within the banking union has transformed financial risk management from reactive to proactive.

Borrower-based macroprudential measures aim to contain risk at the borrower level by restricting the amount of debt individuals can take on. Common tools include LTV limits, which restrict borrowing based on property value, and DSTI limits, which restrict the portion of a borrower's income that can be used for debt repayments. These measures help reduce credit risk by limiting exposure to volatile real estate markets and preventing over-indebtedness. Additionally, these measures introduce a cross-national dimension to macroprudential regulation, establishing uniform borrower limits across countries to diminish systemic vulnerabilities and provide a consistent level of risk reduction.

Borrower-based measures have been refined over the past decade and are increasingly being integrated into the financial rulebooks of EU member states. The implementation of these measures began around 2015 as housing markets in several EU countries showed signs of unsustainable growth. Ireland and Sweden were among the first to implement LTV limits, addressing concerns about an overheated property sector. As more countries recognized the risks of rapid credit expansion, the policy response evolved to include a broader range of borrower-based measures.

Between 2018 and 2020, countries like Portugal and Slovakia introduced DSTI limits, adding further restrictions on excessive borrowing. The period from 2021 to 2024 was focused on refining and standardizing these measures, with many member states adjusting thresholds and frameworks according to the ECB's toolkit. This effort has created a more cohesive and systematic supervisory and governance landscape within the banking union, enhancing risk management and market discipline.

The adoption of borrower-based macroprudential measures has had a positive impact on financial stability in the EU. Household credit growth moderated in several jurisdictions following the introduction of these measures, successfully curtailing risky borrowing behavior and lowering overall credit risk to banks. In many jurisdictions, the quality of bank loan portfolios improved, with non-performing loan ratios decreasing and organizations better able to absorb shocks from interest rate hikes and economic downturns. Property markets also stabilized in areas where previous excessive increases in property prices were moderated, indicating that these tools helped control housing cycles.

These improved outcomes were not only due to the specific measures implemented but also to the collaborative approach and continuous review of the overall policy stance within the banking union. However, borrower-based macroprudential measures faced practical and structural barriers. Regulatory arbitrage, where borrowers or lenders sought jurisdictions with less strict lending standards, highlighted the need for stronger policy coordination and better alignment of rules across all EU countries. Additionally, weak or incomplete borrower-level data limited regulators' ability to monitor risk exposures and calibrate measures, making it difficult for some countries to set the right thresholds for LTVs or DSTIs.

These experiences underscore the importance of a robust data infrastructure, a transparent process for evaluating policies, and consistent engagement between national and EU authorities. In the future, borrower-based macroprudential interventions are likely to evolve with advancements in data analytics and digital finance. Improved access to borrower information will enable near real-time tracking of financial behavior, allowing regulators to react more rapidly to new challenges. The ECB also expressed interest in expanding 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, with a shared framework between policymakers to limit differences in cross-border situations and enhance the efficiency of supervision overall.

The EU's experiences with borrower-based macroprudential regulation over the past decade may serve as a global reference point. When properly designed and continually adjusted, these measures can be a strong defense against future credit crises.