MS Summary of household interviews
UK Almost half of the interviewed households reported being excluded from credit as a result of their financial difficulties, but most of these did not consider this to be a problem. However, one interviewee specified that she was taking measures to improve her credit rating, by signing up for a credit card with a high interest rate. None of the interviewed households reported being excluded from a bank account or any other product or service that they considered to be essential.
Slovenia More than a quarter of the interviewed households reported that they had no access to credit as a result of their financial situation, and two households were excluded from a bank account. In addition, one interviewee explained that he had no access to the Internet, which impeded his ability to look for a job. A further two households indicated that they had not yet been excluded from any essential services, but that they feared such exclusion in the future.
Hungary Eight of the 20 households indicated that they were excluded from a bank account or credit. One interviewee explained that he would not want to take out credit anyway, but another interviewee found her exclusion from credit to be inconvenient as it made it harder refinance or rationalise her other debt, and because she did not have money available in case any sudden costs arose. One interviewee thought that he would not be able to get a contract for a mobile phone and that he would have to a buy a phone card from the supermarket.
France Four households were excluded from credit as a result of their financial difficulties, and two from a bank account. Five interviewees reported that they were excluded from other financial services, namely cheque books and debit cards (two of these were among the four households who were excluded from credit). Two households had experienced exclusion from telecommunication services, while one household had faced gas disconnection for a period of nine months.
Spain Regarding the exclusion of services, eight households were not excluded from any service. Slightly less than half of households were excluded from telephone and communication services. In three cases, the households only managed to avoid exclusion from basic services, such as water and electricity, through the help of friends, relatives or charity. One household could not live in their own house because all the services were disconnected and it would probably be repossessed. Seven households were excluded from credit or a bank account.
Germany Eight interviewees reported that they had at least temporarily been excluded from a bank account. In one case, the interviewee had been unable to pay his rent for three months as a result. In addition, four households felt themselves to be excluded from credit. Three interviewees indicated that they had
7.3
CONSEQUENCES OF OVER-INDEBTEDNESS FOR THE FINANCIAL
SERVICES INDUSTRY
The effect of household over-indebtedness on the financial industry is an important question. Theory predicts that when a negative income or wealth shock occurs, particularly in an environment characterised by high level of household indebtedness, debtors may find it difficult to meet their commitments. This causes an increase in non-performing loans, weakening bank balance sheets. This in turn leads to a reduction in credit availability, as financial institutions become more wary about lending. In the case of decreasing asset prices (e.g. housing), bank balance sheets are further weakened. When borrowers fall behind on mortgage or other payments, non- performing loans are crystallised for creditors, and if creditors repossess, fire sales and the perception of further lowered asset prices reduce the net worth of creditors assets. This may lead to a decrease in trust from consumers (leading to 'bank runs'), or from other banks (causing a freeze in the interbank market).229
This is not just a theoretical possibility. For example, the bursting of the massive property bubble which developed from 2000 to 2006 led to heavy losses for over- leveraged Irish banks.230 At the end of 2003, net indebtedness of Irish banks to the
rest of the world was 10% of GDP; by early 2008 borrowing, mainly for property, had jumped to over 60% of GDP. Massive write-downs on the values of these loans during the financial crisis led to the insolvency and effective nationalisation of some of the major banks in the Irish system.231
For the EU as a whole, costs of defaults for creditors were seen as most important overall (average score 7.1) consequence of over-indebtedness for the financial services industry as going by stakeholder interviews. Other consequences, such as costs of arrears, more restrictive lending practices, and increased costs for financial service providers were all seen as more or less equally important (5.8-6.3). Lower demand for credits because of higher premiums was seen as the least important consequence (5.3).
Taking each aspect individually, costs of defaults for creditors were seen as highly important by stakeholders in Portugal (8.4), Spain (8.2), and Italy (8.8). In Member States where this was important, the impact of the financial crisis was frequently
229 This section acknowledges the contributions made by Tom McDonnell from the independent research organisation TASC regarding
the macro-economic aspects in the stakeholder conference.
230 According to a report commissioned by the Irish government to look into the causes of the crash real residential property prices
jumped to almost four times their historic norm by 2007, and bank lending to the property market soared. (Honohan, P., 'The Irish Banking Crisis Regulatory and Financial Stability Policy 2003-2008', Commission of Investigation into the Banking Sector in Ireland, Dublin, 2010).
231 Nyberg, 2011. P., Misjudging Risk: Causes of the System Banking Crisis in Ireland, Commission of Investigation into the Banking Sector
mentioned. In Estonia, financial industry stakeholders identified costs of default as substantial and leading to losses in the banking sector in 2009 and 2010. In Italy, the costs of bad debts were triple that of their 2000-2007 average in 2011, and the slow speed of the justice system in processing cases were seen as compounding this problem.
Loss of potential customers through more restrictive lending practices was perceived as the most important consequence for the financial industry by stakeholders from Portugal (7.9) and Romania (7.6). Respondents from Germany were among those who considered it the least important (3.7). In Ireland, mortgage over-indebtedness in particular was seen as resulting in reduced lending activities by Irish financial institutions; one respondent noted that: "(W)hat most banks are doing is that they are restricting credit; regulation is not affecting them anymore."
Increased costs for providers because of stricter regulation were also seen as moderately important overall. Respondents from Portugal rated highest on this measure (8.2), while those in Germany (3.4), Austria (3.5), Belgium and the Czech Republic (both 4.0) rated as the lowest. A UK stakeholder noted that though consequences for the financial industry (such as stricter regulation) could have initial costs, they could also reduce the incidence of defaults and save money in the long term.
Lower demand for credit because of higher risk premiums was seen as least important by stakeholders overall, possibly because of real interest rates being historically low232 and because consumers would not be price-sensitive to moderate
changes in risk premiums.
In a cluster of countries few consequences for the financial industry were considered very important. These were typically Member States less affected by the financial crisis. In Austria, low default rates covered the administrative costs of debt collection efforts. Default rates in the Netherlands were seen as stable and costs covered by existing credit pricing, while credit losses incurred by credit institutions remained at a very low level in Sweden and Finland. This was also the case in Germany and the Czech Republic, where interviewees noted that the average default rate was less than 3% and that any rises in costs relating to higher defaults would simply be passed on to new consumers. In Austria, one stakeholder, pointed to corporate credit default as a more serious threat to banking stability than consumer credit or household loans. In some countries more strongly affected by the financial crisis (Ireland, Latvia, Greece, Estonia, Spain, Hungary, Italy) however, the situation was quite different. For
example, in Hungary it was reported that an early repayment scheme of loans issued by private banks in foreign (mostly Swiss Franc) currency caused large losses for the banking system.
In Ireland, two respondents referred to 'internal' difficulties within banks resulting from the wave of over-indebtedness there since the crisis. The negative impact on the morale of front-line staff dealing with struggling borrowers, and the low size of their loan arrears teams were also reported. These problems were compounded by large scale job losses in the now-nationalised banks.233