Debt Service and Default: Calibrating Macroprudential Policy Using Micro Data

By Erlend Nier, Radu Popa, Maral Shamloo, Liviu Voinea

August 22, 2019

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Erlend Nier, Radu Popa, Maral Shamloo, and Liviu Voinea. Debt Service and Default: Calibrating Macroprudential Policy Using Micro Data, (USA: International Monetary Fund, 2019) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

We provide empirical evidence to support the calibration of a limit on household indebtedness levels, in the form of a cap on the debt-service-to-income (DSTI) ratio, in order to reduce the probability of borrower defaults in Romania. The analysis establishes two findings that are new to the literature. First, we show that the relationship between DSTI and probability of default is non-linear, with probability of default responding to increases in DSTI only after a certain threshold. Second, we establish that consumer loan defaults occur at lower levels of DSTI compared to mortgages. Our results support the recent regulation adopted by the National Bank of Romania, limiting the household DSTI at origination to 40 percent for new mortgages and consumer loans. Our counterfactual analysis indicates that had the limit been in place for all the loans in our sample, the probability of default (PD) would have been lower by 23 percent.

Subject: Consumer loans, Credit, Financial institutions, Loans, Money, Mortgages, National accounts, Personal income

Keywords: Borrower characteristic, Consumer loans, Credit, DSTI limit, DSTI range, DSTI ratio, Europe, Household credit, Loans, Macroprudential policy, Mortgage borrower, Mortgages, Personal income, Probability of default, Romania, WP

Publication Details

Pages:

45
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/182
Stock No:

WPIEA2019182
ISBN:

9781513509099
ISSN:

1018-5941

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