Who Borrows and Who May Not Repay?
In this paper we use Household Budget Survey data to analyze the evolution of the household credit market in the Czech Republic over the period 2000â€“2008. While the share of households that borrow remained stable and below 40%, the amount of debt outstanding increased. We estimate a series of models of the determinants of borrowing. We next merge our data with the Statistics on Income and Living Conditions in 2005â€“2008, which contain direct information on repayment behavior, in order to test the validity of the standard debt burden measure as a predictor of default. We propose an alternative indicator â€“ the adjusted debt burden (ADB), defined as the ratio of loan repayments to discretionary income, constructed as net income minus the living minimum (the minimum cost of living for a given household composition as set by the Czech Statistical Office), 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.
|Date of creation:||Dec 2010|
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- Nathalie Girouard & Mike Kennedy & Christophe André, 2006. "Has the Rise in Debt Made Households More Vulnerable?," OECD Economics Department Working Papers 535, OECD Publishing.
- Slawomir Zajaczkowski & Dawid Zochowski, 2007.
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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.
- 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.
- 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.
- Jappelli Tullio & Pagano Marco & Di Maggio Marco, 2013. "Households' indebtedness and financial fragility," Journal of Financial Management, Markets and Institutions, Società editrice il Mulino, issue 1, pages 23-46, January.
- 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.
- 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.
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