Stress-testing croatian households with debt -- implications for financial stability, Vol. 1 of 1

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Stress-testing croatian households with debt -- implications for financial stability

Author:	Sugawara, Naotaka; Zalduendo, Juan;	Collection Title:	Policy Research working paper ; no. WPS 5906
Country:	Croatia;	Date Stored:	2011/12/12
Document Date:	2011/12/01	Document Type:	Policy Research Working Paper
Language:	English	Region:	Europe and Central Asia
Report Number:	WPS5906	SubTopics:	Bankruptcy and Resolution of Financial Distress; Emerging Markets; Currencies and Exchange Rates; Debt Markets; Banks & Banking Reform
Volume No:	1 of 1

Summary: The purpose of this paper is to stress test the resilience of Croatian households with debt to economic shocks. The shocks not only impact a household's welfare, but also increase the probability of loan default. As a result, there is a direct link between these stress-testing exercises and financial stability risks. The authors find that very few households are at risk as a result of the shocks experienced over the past few years; new vulnerable households represent about 2 percent of all households, 6 percent of households with debt, and 2-3 percent of aggregate banking system assets. This suggests that household over-indebtedness in Croatia is unlikely to become a drag on aggregate economic activity and that financial stability risks remain manageable. One caveat should be noted. Some 27-31 percent of households with debt, representing 8-9 of banking system assets, are vulnerable even before being subjected to an economic shock. Since NPLs were low before the global financial crisis, it can be argued that banks knew something about some of these households that is not captured by household budget surveys. It follows that the calculations in this paper should primarily focus on the increased vulnerability of households as a result of shocks and are likely to represent an upper bound to the financial stability risks faced by Croatia on account of household indebtedness.


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