4/2017 Jaanika Meriküll, Tairi Rõõm. The financial fragility of Estonian households: Evidence from stress tests on the HFCS microdata

Working Papers of Eesti Pank 4/2017

This paper analyses the financial fragility of the Estonian household sector using microdata from the Household Finance and Consumption Survey (HFCS). We use a stress-testing framework where the probability of default is evaluated on the basis of the financial margin (i.e. the ability to service debt from current income) and the availability of financial buffers. The HFCS data from household interviews are complemented with information from administrative registers. This lets us evaluate and compare measures of financial vulnerability that draw on data from different sources. We derive a set of indicators to identify households that are financially distressed and analyse the sensitivity of financial sector loan losses to adverse shocks. The stress-test elasticities are assessed separately for three standardised negative macroeconomic shocks: a rise in interest rates, an increase in the unemployment rate, and a fall in real estate prices. In addition, we evaluate the impact of a simultaneous shock mimicking the dynamics of these three variables during the Great Recession. It is found that: (1) despite there being a lot of households with financial difficulties, the risks for banks from the household sector are limited; (2) financial fragility is strongly negatively related to income; (3) the loan default rate of households is most sensitive to shocks to the unemployment rate and the interest rate, while the loan losses of banks are affected most by real estate price shocks; and (4) compared with the survey data, the information collected from administrative sources points to higher household default rates and larger bank losses.

DOI: 10.23656/25045520/42017/0142

JEL Codes: D14 (household saving: personal finance); E43 (interest rates: determination, term structure, and effects); G21 (banks, depository institutions, micro finance institutions, institutional investors)

Keywords: household financial fragility, stress-testing, household finance and consumption survey, Estonia, measurement error in household surveys

DOI: 10.23656/25045520/42017/0142

Authors’ e-mail addresses: jaanika.merikyll [at] eestipank.ee, tairi.room [at] eestipank.ee


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The views expressed are those of the author and do not necessarily represent the official views of Eesti Pank or the Eurosystem.