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Who Borrows and Who May Not Repay?

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  • Alena Bicakova
  • Zuzana Prelcova
  • Renata Pasalicova

Abstract

We use Household Budget Survey data to analyze the evolution of the household credit market in the Czech Republic over the period 2000–2008. We next merge our data with the Statistics on Income and Living Conditions in 2005–2008, in order to test the validity of the standard debt burden measure as a predictor of default. We propose an alternative indicator – the adjusted debt burden (ADB), defined as the ratio of loan repayments to discretionary income, constructed as net income minus the living minimum, which turns out to be a superior predictor of default risk. Limited by the data, we use a fairly broad concept of default, namely, the inability to make loan repayments on time. Based on the distribution of default risk across the levels of the adjusted debt burden, we suggest that a 30% ADB threshold should be used as the definition of overindebtedness, with an average default risk of 17%. Finally, we show that overindebtedness and local economic shocks are closely related, suggesting that default risk should be always considered in the context of regional economic conditions.

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Bibliographic Info

Paper provided by The Center for Economic Research and Graduate Education - Economic Institute, Prague in its series CERGE-EI Working Papers with number wp443.

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Date of creation: Jul 2011
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Handle: RePEc:cer:papers:wp443

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Keywords: household credit; debt burden; repayment; regional default risk;

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  1. Dawid, Żochowski & Sławomir, Zajączkowski, 2006. "The Distribution and Dispersion of Debt Burden Ratios Among Households in Poland and its Implications for Financial Stability," MPRA Paper 692, University Library of Munich, Germany, revised 19 Oct 2006.
  2. Nathalie Girouard & Mike Kennedy & Christophe André, 2006. "Has the Rise in Debt Made Households More Vulnerable?," OECD Economics Department Working Papers 535, OECD Publishing.
  3. Daniela Vandone, 2007. "Consumer credit in Italy. Diffusion and territorial differences," UNIMI - Research Papers in Economics, Business, and Statistics, Universitá degli Studi di Milano unimi-1062, Universitá degli Studi di Milano.
  4. Petr Jakubik & Christian Schmieder, 2008. "Stress Testing Credit Risk: Is the Czech Republic Different from Germany?," Working Papers, Czech National Bank, Research Department 2008/9, Czech National Bank, Research Department.
  5. Jappelli Tullio & Pagano Marco & Di Maggio Marco, 2013. "Households' indebtedness and financial fragility," Journal of Financial Management, Markets and Institutions, Società editrice il Mulino, Società editrice il Mulino, issue 1, pages 26-35, January.
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