## Debt Service and Default: Calibrating Macroprudential Policy Using Micro Data

_IMF Working Papers, August 22, 2019_

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## Bibliographic details
- Authors: Erlend Nier, Radu Popa, Maral Shamloo, Liviu Voinea
- Published: August 22, 2019
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513509099.001

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### Key findings
- The relationship between debt-service-to-income (DSTI) and probability of default (PD) is non-linear, with PD responding to increases in DSTI only after a certain threshold.
- Consumer loan defaults occur at lower levels of DSTI compared to mortgages.
- A counterfactual analysis indicates that had a DSTI limit been in place for all loans in the sample, the probability of default (PD) would have been lower by 23 percent.
- The empirical results support the National Bank of Romania’s regulation limiting household DSTI at origination to 40 percent for new mortgages and consumer loans.

### Analysis and evidence
- Empirical microdata on household indebtedness and loan performance in Romania underpin the calibration of a cap on household indebtedness expressed as a DSTI ratio.
- The analysis identifies a threshold effect in the DSTI–PD relationship rather than a constant marginal effect across the DSTI distribution.
- Distinct default dynamics are documented across loan types, with consumer loans exhibiting default at lower DSTI levels relative to mortgages.

### Policy implications and recommendations
- Implementing a cap on DSTI at origination can materially reduce borrower default risk.
- Calibrate DSTI limits recognizing non-linear risk increases: thresholds matter more than uniform incremental DSTI changes.
- Differentiate DSTI-based macroprudential measures by loan type, given that consumer loans show higher default sensitivity at lower DSTI levels than mortgages.
- The National Bank of Romania’s 40 percent DSTI cap for new mortgages and consumer loans is empirically supported by the analysis.

### Quantitative highlights
- DSTI cap adopted at origination: 40 percent (for new mortgages and consumer loans).
- Estimated reduction in probability of default under counterfactual DSTI cap: 23 percent.
- Working Paper length: 45 pages.
- Working Paper series: Working Paper No. 2019/182, Issue 182, Volume 2019.

*Source: IMF Working Paper "Debt Service and Default: Calibrating Macroprudential Policy Using Micro Data" (August 22, 2019).*

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_Source: https://www.imf.org/en/publications/wp/issues/2019/08/22/debt-service-and-default-calibrating-macroprudential-policy-using-micro-data-48533_