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Financial fragility of euro area households

Dawid Żochowski, Miguel Ampudia Fraile and Has van Vlokhoven

No 1737, Working Paper Series from European Central Bank

Abstract: We propose a novel framework to identify distressed households by taking account of both the solvency and the liquidity situation of an individual household. Using the data from the Household Finance and Consumption Survey and the country-level data on non-performing loans we calibrate our metric of distress and estimate stress-test elasticities in response to an interest rate shock, an income shock and a house price shock. We find that, albeit euro area households are relatively resilient as a whole, there are large discrepancies in the impact of macroeconomic shocks across countries. Furthermore, while losses given default as calculated using our framework are low, they are sensitive to house prices changes. Hence, any factors hindering the seizure of the collateral or lowering its value, such as inefficient legal systems, moratoria on foreclosures or bottlenecks in judicial procedures may significantly increase losses facing banks. Finally, we demonstrate that our framework could be used for macroprudential purposes, in particular for the calibration of country level loan-to-value ratio caps. JEL Classification: D10, D14, G21

Keywords: Financial Stability; household finance; household indebtedness; stress testing (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-eec
Date: 2014-10
Note: 2152671
References: View references in EconPapers View complete reference list from CitEc
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Journal Article: Financial fragility of euro area households (2016) Downloads
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