After the summer of 2007, credit to households has shifted into the focus of policymakers and the banking industry alike. What began with rising default rates in the US subprime mortgage market, may develop into a global credit crisis. European banks already face the consequences of borrowers being unable to service their contracts on time. In turn, central banks see their scope of action severely constrained, and the macroeconomic implications of these recent developments may be very farreaching.
Against this background, we provide a systematic international comparison of household debt holding and of access to credit, using microeconomic data that allow us to trace the evolution of debt and to assess constraints over the past one-and-a-half decades. Whilst current media attention is directed at whether access to borrowing has been too easy for some households, the academic literature has debated for a long time whether financial markets institutions may have inefficiently constrained household borrowing, and whether policy ought not to remove or ease such constraints.
Household debt holding has indeed increased substantially over the last decades in many OECD countries, both in terms of the total amount outstanding and relative to incomes, household debt portfolios have become more diversified. Have borrowing constraints become a non-issue?
We argue in this paper that this is not necessarily the right conclusion, based on analysis and comparison of micro data on household debt holding from four OECD countries that display very different patterns of debt holding and where credit constraints seem to play very different roles. Whereas we do find strong time trends, between-country differences remain very stark and appear empirically more important than within-country changes over time. These pertinent patterns suggest that institutions that shape demand and supply in credit markets play an important role, and we document substantial institutional differences between countries.
Very few studies have examined international differences in the volume of household debt or in credit constraints. Jappelli and Pagano (1989) started by analysing any excess sensitivity of consumption expenditure to current income in an international comparison. They interpret their findings in the light of institutional differences across seven countries, and relate implied differences in the demand and supply of loans to variation in the severity of liquidity constraints. Bacchetta and Gerlach (1997) used aggregate data for five OECD countries to find that overall consumption expenditure shows excess sensitivity with respect to both mortgage and consumer credit and that the wedge between borrowing and lending rates is significantly related to consumption in three of the five countries.
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