Debt Service and Default: Calibrating Macroprudential Policy Using Micro Data

46 Pages Posted: 23 Sep 2019

See all articles by Erlend Nier

Erlend Nier

International Monetary Fund (IMF)

Maral Shamloo

London School of Economics & Political Science (LSE) - Department of Economics

Liviu Voinea

National Bank of Romania

Date Written: August 2019

Abstract

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.

Keywords: Interest rates on loans, Interest rates, Financial crises, Financial institutions, Macroprudential policies and financial stability, Macroprudential policy, Household credit, Romania, WP, consumer loan, borrower, NBR, PDs, mortgage loan

JEL Classification: E51, E58, G21, G28, E01, E52, O24, H63

Suggested Citation

Nier, Erlend and Shamloo, Maral and Voinea, Liviu, Debt Service and Default: Calibrating Macroprudential Policy Using Micro Data (August 2019). IMF Working Paper No. 19/182, Available at SSRN: https://ssrn.com/abstract=3457770

Erlend Nier (Contact Author)

International Monetary Fund (IMF)

700 19th Street, N.W.
Washington, DC 20431
United States

Maral Shamloo

London School of Economics & Political Science (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Liviu Voinea

National Bank of Romania ( email )

Bucharest
Romania

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