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Indebtedness: Report on the distribution of debt across Euro-Area shows need for further research on characteristics and situation of indebted households.


The aim of this paper is twofold. First, we present an up-to-date assessment of the differences across euro area countries in the distributions of various measures of debt conditional on household characteristics. We consider three different outcomes: the probability of holding debt, the amount of debt held and, in the case of secured debt, the interest rate paid on the main mortgage. Second, we examine the role of legal and economic institutions in accounting for these differences. We use data from the first wave of a new survey of household finances, the Household Finance and Consumption Survey, to achieve these aims. We find that the patterns of secured and unsecured debt outcomes vary markedly across countries. Among all the institutions considered, it is the length of asset repossession periods that best accounts for the features of the distribution of secured debt. In countries with longer repossession periods, the fraction of people who borrow is smaller, the youngest group of households borrow lower amounts (conditional on borrowing), and the mortgage interest rates paid by low-income households are higher. Regulatory loan-to-value ratios, the taxation of mortgages and the prevalence of interest-only or fixed-rate mortgages deliver less robust results.


This paper has studied the distribution of household debt outcomes across euro area countries and examined the role of institutions in explaining the heterogeneity in the impact of household socioeconomic and demographic characteristics on these debt outcomes. In particular, we analyze the role of legal enforcement of contracts, of tax treatment of mortgage payments, loan-to-value ratios and of information about borrowers in shaping the distribution of the fraction of borrowers, the amount borrowed and, in the case of secured debt, the mortgage interest rate paid. To that end, we use a novel household dataset - the Household Finance and Consumption Survey, a coordinated effort of 15 countries to collect ex-ante harmonized data on household wealth, debt and income.

In terms of explaining secured debt holdings within countries, our results show that the age, income and education level of household members are important demographic considerations. In this context, we find evidence of a hump-shaped profile of secured debt holding over age-cohort groups; the chances of borrowing peak for cohorts aged 35-44 years, before the (crosssectional) income profile peaks, possibly suggesting a role for secured debt in smoothing household consumption.

We find that while these socio-economic and demographic factors are important correlates of household debt outcomes, there is considerable heterogeneity in the relative importance of these factors across the countries in our sample. While our results show a number of country-level institutions to be correlated with these effects, in a multivariate setting we find that the length of repossession periods best explains the features of the distribution of debt that we analyze. In countries with one standard deviation longer repossession procedures we find that the proportion of households with debt is 16 percentage points smaller, the amount borrowed by the youngest set of households (conditional on borrowing) is 12 per cent lower, and the interest rates paid by low income households are 0.3 percentage points higher when we evaluated impacts at the rest of covariate of the reference
group. These results are robust to the inclusion of other institutions.

One interpretation of our results is that the supply of secured credit is affected by legal processes that delay the recovery of collateral in the case of non-repayment. In this case, banks react to expected losses due to longer repossession periods not necessarily by rationing quantities or rejecting applications but also by pricing secured debt differently across income groups and charging relatively higher interest rates to low income households.

Finally, we have documented substantial heterogeneity in the distribution of household debt across countries. Such diversity has implications for a wide array of outcomes that includes macroeconomic policy - the consequences of an interest rate increase depend on the fraction and the characteristics of indebted households - as well as financial stability issues – arrears depend on the income, age and household structure of indebted households. Those outcomes merit further research.

ID: 48414
Publication date: 02/12/13

The distribution of debt across euro area countries: the role of Individual characteristics, institutions and credit conditions Bank of Spain Working Paper N.º 1320 (29.11.2013)

Created: 02/12/13. Last changed: 02/12/13.
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