Indicators of Financial Vulnerability: A Household Level Study

Abstract

This paper compares two indicators of household vulnerability using the Bank of Italy’s Survey on Household Income and Wealth (2008-2014). According to the first indicator, a household is considered vulnerable if its debt service-to-income ratio exceeds 30 per cent and its income is below the median of the population. According to the second, a household is defined vulnerable if the sum of its income and liquid financial assets is not sufficient to cover debt payments and basic living costs for four months. While providing similar information on the proportion of households deemed vulnerable, the two indicators capture different aspects of the sector’s financial fragility: vulnerable households according to the first indicator have, on average, higher income, liquid assets and debt than those identified by the second indicator. Moreover, while the first indicator shows a lower correlation with payment arrears, its simplicity, timeliness and less arbitrary components make it better suited for cross-country comparisons.

Keywords: household vulnerability, debt service, financial margin

JEL Classification: D12, I32