XXV Edition

1-2 December 2016"

What are the Triggers for Arrears on Debt? Evidence from Quarterly Panel Data

Kukk Merike, Tallinn University of Technology and Bank of Estonia

The paper investigates the triggers of arrears on debt in Estonia, which is a full recourse country similar to other euro area countries. An extensive individual-level quarterly panel dataset enables quarterly debt repayment problems to be tracked while controlling for individual specific heterogeneity. The estimations show that lower income and higher debt service ratios are associated with a higher probability of arrears, confirming the “ability to pay” hypothesis. Newly taken consumer loans increase the probability of arrears and the relationship is stronger for loans granted during a recession when credit conditions were tight. Newly taken housing loans exhibit a lower probability of arrears and the same applies to loans granted during the period of easy credit conditions and high real estate prices. The results suggest that the most efficient measures for addressing arrears on debt would be those that mitigate income declines and the debt servicing burden.

Area: Financial Stability

Keywords: arrears, income decline, the debt service ratio, housing loans, consumer loans

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