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Who Borrows and Who May Not Repay?

  • Alena Bicakova
  • Zuzana Prelcova
  • Renata Pasalicova

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

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Date of creation: Jul 2011
Date of revision:
Handle: RePEc:cer:papers:wp443
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  1. Nathalie Girouard & Mike Kennedy & Christophe André, 2006. "Has the Rise in Debt Made Households More Vulnerable?," OECD Economics Department Working Papers 535, OECD Publishing.
  2. Slawomir Zajaczkowski & Dawid Zochowski, 2007. "The distribution and dispersion of debt burden ratios among households in Poland and its implications for financial stability," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Proceedings of the IFC Conference on "Measuring the financial position of the household sector", Basel, 30-31 August 2006 - Volume 2, volume 26, pages 62-74 Bank for International Settlements.
  3. Tullio Jappelli & Marco Pagano & Marco di Maggio, 2008. "Households’ Indebtedness and Financial Fragility," CSEF Working Papers 208, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 09 Sep 2010.
  4. Petr Jakubik & Christian Schmieder, 2008. "Stress Testing Credit Risk: Is the Czech Republic Different from Germany?," Working Papers 2008/9, Czech National Bank, Research Department.
  5. Daniela Vandone, 2007. "Consumer credit in Italy. Diffusion and territorial differences," UNIMI - Research Papers in Economics, Business, and Statistics unimi-1062, Universitá degli Studi di Milano.
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