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Norges Bank Financial Stability
HOUSEHOLD EXTERNAL FINANCE AND CONSUMPTION
Timothy J. Besley, London School of Economics (LSE) and CEPR
Neil Meads, Bank of England
Paolo Surico, Bank of England
Comments from a practitioner:
Bjørn H. Vatne, Financial Stability, Norges Bank
Bjørn H. Vatne
1
Norges Bank Financial Stability
HOUSEHOLD EXTERNAL FINANCE AND CONSUMPTION
•
Hypothesis:
– terms on which households access to external finance matters for
consumption
•
Method:
– a theoretical motivation for a risk premium for risky borrowers
– define first time buyers with little collateral as risky borrowers
– estimate what premium these borrowers are asked to pay in the mortgage
market
– construct an HEF-index based on the spread paid by risky borrowers from
mortgage data
– analyse the correlation between consumption growth and HEF-index with
regressions
• aggregate and cohort levels
•
Conclusion
– the index is robustly correlated with consumption growth between 1975 and
2005
Bjørn H. Vatne
2
Norges Bank Financial Stability
The analysis relies on two critical points
1 The index captures the important changes in
the terms that the households faces in the
credit market
2 There is a causality between the conditions
in the credit marked (index) and household
consumption
Bjørn H. Vatne
3
Norges Bank Financial Stability
Which factors affect credit risk in households?
BANKS
• Probability of default:
margin = income – tax – basic living expenses – (interest rate + repayment rate)*loan
– negative margin: debt at risk
•
Loss given default:
Loan/value
•
Bank decision:
Loan/ no loans
• probability of default
Size of loan and interest
• loss given default
•
Are young first time buyers risky?
HOUSEHOLDS
• Margin can be used to consumption and non repayment savings
• Consumption depends on the saving rate of all households
• How the interest rates of risky households affect the consumption of other
households?
–
trough house prices?
Bjørn H. Vatne
4
Norges Bank Financial Stability
It would be interesting to know…
• how the HEF index relate to other indictors of
credit rationing?
– Credit Conditions Surveys
– Loan to income, Loan to value indicators
• how changes in the economy affect the HEF
index
– bank stress
– house prises
– uemployment
Bjørn H. Vatne
5
Norges Bank Financial Stability
Do the HEF-index predict consumption
falls?
•
•
•
We would expect a delay
between credit rationing and
consumption fall?
Causality tests?
Or is there an underlying factor
(economic expectations) that
drives both series?
Bjørn H. Vatne
6
Norges Bank Financial Stability
Summing up
• Understanding the connection between terms in the
credit market and consumption is important to
– monetary policy and financial stability
– understand financial accelerators
• Access to timely micro data is necessary to identify
the groups of households that drives the dynamics
• A suggestion
–
–
–
–
credit terms of first home buyers – house prices
house prices – saving rate of home owners
households with small margins – credit risk households
consumption – credit risk firms
Bjørn H. Vatne
7