Universit` degli Studi di Milano a

Finance, Business, and Marketing

Year Paper

Consumer credit in Italy. Diusion and territorial dierences.

Daniela Vandone
University of Milan

This working paper site is hosted by The Berkeley Electronic Press (bepress) and may not be commercially reproduced without the publishers permission. http://services.bepress.com/unimi/business/art3 Copyright c 2007 by the author.

Consumer credit in Italy. Diusion and territorial dierences.

Abstract
The analysis sets out to clarify whether households demand for consumer credit can be adequately explained by models presented in the literature (lifecycle and permanent income) or whether other factors are observable, such as the use of debt to alleviate nancial diculties. With this in mind, the research seeks to establish whether specic determinants characterise the consumer credit market in dierent areas of the country. The Bank of Italy Survey on Household Income and Wealth for 2004 (SHIW) is used to identify determinants of consumer credit and the possible existence of territorial specicity.

CONSUMER CREDIT IN ITALY. DIFFUSION AND TERRITORIAL DIFFERENCES Daniela Vandone*

Abstract The analysis sets out to clarify whether households demand for consumer credit can be adequately explained by models presented in the literature (life-cycle and permanent income) or whether other factors are observable, such as the use of debt to alleviate financial difficulties. With this in mind, the research seeks to establish whether specific determinants characterise the consumer credit market in different areas of the country. The Bank of Italy Survey on Household Income and Wealth for 2004 (SHIW) is used to identify determinants of consumer credit and the possible existence of territorial specificity.

Keywords: consumer credit, household debt sustainability, Survey on Household Income and Wealth, territorial specificity. JEL classification: D14, G21

*Assistant professor of Economics of Markets and Financial Intermediaries, DEAS (Department of Economics, Management and Statistics) University of Milan (Italy), daniela.vandone@unimi.it I would like to thank Sara Romagnoli and Riccardo Troso for their help in processing and elaborating the data used. I am particularly grateful to Prof. Luisa Anderloni for her encouragement and suggestions. Obviously the usual disclaimer applies to any errors, omissions, etc..

Contents: 1. Introduction 2. The Italian consumer credit market 3. Theory and evidence 4. An analysis of the data 5. Conclusion 6. References 7. Appendix

1. Introduction Demand for consumer credit on the part of Italian households has risen sharply in recent years. Current household debt levels are relatively low in comparison to other countries and due to a late start, the diffusion of consumer credit in Italy is still limited. However, an analysis of emerging territorial differences and demand side behaviour patterns reveals markedly differing socio-economic situations, which suggest that the reasons for indebtedness are not wholly similar to those described in the literature. In particular, debt is likely to be used by certain types of borrowers or in certain geographical areas not to smooth intertemporal consumption as is typically suggested, but to offset financial difficulties. This paper analyses the factors influencing the diffusion of consumer credit in Italy and regional characteristics if any that distinguish one area of the country from another. The paper is organised as follows: paragraph 2 provides an outline of the Italian consumer credit market, paragraph 3 analyses the theoretical models described in the literature, whilst paragraph 4 examines data taken from the Bank of Italys Survey on Household Income and Wealth (SHIW), focusing particularly on territorial characteristics and differences. Paragraph 5 concludes. The research is a response to the growing market for unsecured debt in Italy and the fact that many banking groups are highlighting the strategic importance of this business area as a vehicle for penetrating and consolidating their presence in certain geographical areas. Given the crucial importance of the socio-economic aspects of household debt, it is hoped that the analytical framework adopted in the present paper will represent a useful contribution to research into the areas of household indebtedness and banks lending policies.

1. The Italian Consumer Credit Market The Italian consumer credit market has three particular features: it is small in size in comparison to other major industrialised European countries; it is growing rapidly; it has territorial differences that may imply the need for a reassessment of existing explanations for the diffusion of consumer credit.

a. Low levels of indebtedness Consumer credit is limited both in terms of its diffusion and the share of income it represents. On the basis of total lending granted by banks and finance companies, in 2005 the consumer credit/GDP ratio for Italy is 5.1 per cent in comparison to an EU15 figure of 8.3 per cent, whilst the consumer credit/disposable income ratio for Italy is 6.2 per cent, considerably lower than levels recorded in the United Kingdom (26.3 per cent), Germany (15.7 per cent) and Spain (13.3 per cent).

Chart 1. Consumer credit as a percentage of GDP Chart 2. Consumer credit as a percentage of disposable income

Source: figures calculated using ECRI, 2005

b. Rapid growth levels Despite lower volumes in comparison to other major European countries, consumer credit, however, continues to grow at a faster rate. In the period 2002-2006, the average annual increase in loans to Italian households made available by banks and finance companies was just under 17 per cent. Although the trend in recent years has obviously felt the effects of Italys comparatively late start in this area, expansion in this form of debt has, significantly, risen at a faster rate than income and tracks a tendency on the part of households to consume more and save less.

Chart 3. Consumer credit and disposable income in Italy 2002-2006

200 180 160 140 120 100 80 60 40 20 0 2002 2003 2004 2005 2006 Consumer credit Disposable income

Sources: calculated from Bank of Italy and ISTAT

Increased lending volumes recorded both by banks and finance companies is presumably demand driven, with the increase in demand being explained at an economic level by low interest rates and greater product variety. Behavioural factors must also be taken into account such as the gradual abandonment of traditional pay now debt averse values in preference to the consumption of life-improving products and services. This behaviour change by borrowers against a backdrop of falling interest rates has been encouraged by radical social transformations, the most significant of which for our purposes is the fall in intergenerational asset transfers and the reduced use of informal credit solutions. On the supply side, various factors have made consumer credit increasingly more profitable for lenders and have encouraged its expansion. The most recent of these include product standardisation and regularly updated credit scoring methodologies. On the regulatory plateau, more favourable treatment of banks retail loan portfolios under Basle 2 has also helped. c. Territorial specificity Although consumer credit has grown throughout Italy, the existence of marked differences from one part of the country to another in terms of both levels and demand-side behaviour patterns mean that research is needed into whether the reasons lie in socio-economic differences across the country.

The Bank of Italys Annual Report for 2006 in fact shows that average amounts borrowed per capita using consumer credit solutions do not differ substantially from the North/Centre ( 1,249) and the South ( 1,274). The result is significant in that if there is little difference from one area to another in absolute terms between per capita consumer credit liabilities, presumably in relative terms the weight of indebtedness for southern households is greater. This hypothesis appears to be directly confirmed by figures from the Bank of Italys SHIW: average annual salary in the South amounts to 13,797 in comparison to a national average of 16,555; net individual wealth in the South is almost half the figure recorded in the North and Centre and the difference is continuing to grow (North/Centre: 92,522; South: 47,900); economic poverty indicators show financial tensions to be greater in the South: the share of persons living in low-income households is 29 per cent, more than double the national average of 13.3 per cent, whilst the share of persons in the South living in households with consumption levels below half the national median figure amounts to 17.5 per cent in comparison to the national figure of 7.7 per cent.

Table 1. Territorial differences

Households with consumer credit liabilities (%) Indebted Consumer Average households: credit per annual debt/annual capita earnings available income ratio (%) Net individual wealth Persons in Median Median lowhousehold household income income consumption households

NorthCentre South

13.00% 11.8%

19.9% 24.6%

1,249 1,274

16,555 13,797

92,522 47,990

13.3% 29%

27,740 17,341

20,400 15,000

Source: constructed using Bank of Italy. Annual Report 2006 and SHIW 2006.

The situation illustrated above requires further analysis of consumer credit-related differences that exist between various parts of the country. The following paragraph examines the Italian experience on the basis of traditional theories of individuals indebtedness, with particular attention to the question of territorial specificity raised above. A set of features equipped to identify consumer credit markets on a territorial basis could also be usefully applied to analyses of other domestic markets such as those of

the most recent entrants to the European Union, where rapid expansion of personal debt levels is taking place in more unstable and less developed financial environments. 3. Theory and Evidence The Life-Cycle and Permanent Income models assume that households choose their own optimal level of consumption not only on the basis of current income, but also past and future receipts in order to smooth consumption over their life time. Access to credit would achieve just this by guaranteeing the greater economic welfare that consumption smoothing brings with it. On the other hand, rising levels of indebtedness could be unsustainable due to the inadequate size of current income, leading to over indebtedness and loan re-payment difficulties. With this last point in mind, continuing expansion in consumer credit needs to be monitored as it may not reflect increased economic welfare deriving from improved distribution of income and consumption over time, but a worsening of the condition of household finances. In particular, according to the Permanent Income Theory, what matters to households in determining consumption year-by-year and therefore making decisions regarding savings and indebtedness is their expected lifetime income. It has been repeatedly shown (Deaton 1992; Alessie, Devereux, Weber 1997; Attanasio 1999; Magri 2002; Casolaro, Gambacorta, Guiso 2006) that analyses using the Permanent Income model should take into account other variables which, in addition to current income and consumption, influence the size of debt that households decide to take on, such as social and demographic characteristics, borrowing costs, real estate market trends, spending on consumer durables, likelihood of income shocks and risk aversion levels. Other cross-country analyses (Crook and Hochguertel 2006) have shown how the role these variables play in determining debt levels differs from country to country. It can reasonably be supposed that the differing impact and influence of these variables will also be observable in different parts of the same country. Studies in the area of household debt increasingly focus on identifying the causes of financial difficulties or over indebtedness which can subsequently lead to credit default (Boyes, Hoffman, Law 1989; Crook 2003; Avery, Caleman and Canner 2004). The factors that influence debt demand and/or which may lead to difficulties in debt repayments can be grouped into two distinct categories: household-related factors and institutional-related factors. Household-related factors include the socio-demographic and economic characteristics of individual borrowers and their family nucleus. Age, gender, education, available income, net wealth and type of occupation are variables that determine the level of indebtedness and condition attitudes towards debt repayments.

Young adults, with expectations of rising income, have a higher demand for credit, which over time drops as income levels rise to cover costs and is accompanied by a generally more prudent attitude to debt. The impact of household wealth on indebtedness is not clear cut. Magri (2002) shows that rises in net wealth are accompanied by falls in the demand for credit as consumption is increasingly covered autonomously. However, for households in the middle net wealth bracket, an increase in the demand for credit may stem from significant rises in lifestyle-improving consumption choices. The demand for credit is also positively influenced by education levels: firstly, increased qualifications probably enable higher future earnings along with greater job security and, secondly, provide loan applicants with the skills necessary to evaluate effectively the factors involved in borrowing (Grant 2003, Del Rio and Young 2005). Expectations of rising future income can reasonably be expected to boost the demand for credit: should future income not be expected to rise, there would be no demand for credit as there would be no need to advance financial resources via debt. Magri (2002) highlights the effect with a dummy variable on education levels. The effect of permanent income on the demand for and supply of credit has been studied also by Ferri e Simon (2000), Crook (2005), Cox e Jappelli (1993). On the question of current income levels, evidence is not always concordant. Del Rio and Young (2005) show that very low income levels are typically volatile, so increasing the possibility of credit exclusion. With regards to intermediate income levels, the marginal utility of consumption is high and an increase in income may generate a rise in consumption and a subsequent increase in the need for unsecured debt. The high income bracket is normally associated with falls in the demand for credit. Turning to Italy, Fabbri and Padulla (2004), in line with many studies carried out in the United States, show a positive relation between debt and current income; Magri (2002) however illustrates a negative relation, attributable to the fact that higher income households utilise debt less for the purchase of the home and consumer durables. Situations of financial difficulty are classified in the literature on the basis of the shocks that may lead to debt repayment problems. Negative shocks on household balance sheets include job loss, illness or divorce. The statistically most significant variable to predict debt repayment difficulties is the debt/income ratio. Del Rio and Young (2005) illustrate a positive relation between the level of debt to income ratio and the likelihood of repayment problems. Analogously, Rinaldi and SanchezArellano (2006) show how rises in the debt/income ratio are associated with increased delays in debt repayments, whilst underlining also that if the increase is accompanied by an increase in available income, the negative effect deriving from greater indebtedness is wiped out. The models referred to generally include dummy variables to take into account unexpected events that can negatively impact household balance sheets, such as job

loss or illness. The extent these shocks determines financial difficulties varies significantly from country to country and is crucially dependant on the institutional setting. Institutional-related factors are those that characterise and distinguish domestic credit markets. The principal variables analysed in the literature are the size of the informal credit market (loans from family and friends), the extent of information sharing amongst lenders regarding borrowers credit risk (credit register bureaus) and the efficiency of the legal system to enforce financial contracts. These institutional factors are relevant since they may influence borrowers willingness to repay outstanding debt and, clearly, also the amount: the probability of repayment depends not only on the effective capacity of borrowers to avoid default (a household-related factor), but also on the effectiveness of institutional factors, such as enforcement procedures that deter those from opportunistically seeking bankruptcy or other forms of debt relief. The importance of institutional factors typically emerges in cross-country analyses. There is evidence that, although the set of individual variables impacting debt demand is common from country to country, significant cross-country differences exist with regards as to how households respond to negative shocks: in reaction to the same shocks, borrowers in some institutional settings do not repay their debts, whilst in other contexts they do. Such differences can be explained not only by behavioural deviancy on the part of individual borrowers, but also by differences in the institutional setting in which default takes place. With specific regard to the legal system, Duygan and Grant (2006) show that the probability of payment arrears and bankruptcy increases with the raising of the cost and the lengthening of the time required to enforce the financial contract. They also find that a sudden reduction in income due to, for example, a job loss leads more probably to default in those countries where the legal protection offered to lenders is weak. Grant and Pedulla (2006) point out, however, that the impact of this institutional factor relates significantly only to secured debt such as mortgages, but is irrelevant in the case of unsecured debt forms as consumer credit. On the question of the different forms of customer information sharing in place amongst lenders, Jappelli and Pagano (2006) show that the existence of credit register bureaus reduces the incentive on the part of a borrower to ask for a loan from more than one lender at the same time, thereby running the risk of over borrowing; information sharing reveals the total borrowers debt position system wide. Similarly, Duygan and Grant (2006) show that the likelihood of borrowers insolvency decreases when the financial system can discover previous cases of default as over borrowing persists even in cases of income shocks such as job loss. With regards to the role informal credit markets play, Grant and Padulla (2006) show that the effect of this institutional factor on debt repayment is economically and statistically significant and negatively impacts attitudes towards repayment:

individuals with access to loans from family members or friends consider the possible exclusion from formal credit markets as less problematical as they can in case of need utilise informal credit solutions.

4. An Analysis of the Data 4.1 Methodology In order to identify determinants of consumer credit and the possible existence of differences between parts of the country (territorial specificity), the present analysis utilised the Bank of Italys SHIW for 20061. The analysis sets out to clarify whether demand for unsecured debt in Italy can be adequately explained by models presented in the literature or whether other factors are observable, such as the use of debt to alleviate financial difficulties. With this in mind, the present research seeks to establish whether specific determinants characterise the consumer credit market in different areas of the country. For each household included in the survey, using the Bank of Italy database it is possible to identify the total amount of consumer credit outstanding (CRED_CONS). This figure is the sum of amounts owed for the purchase of non durable goods, motor vehicles, electrical household appliances, furniture and real goods. In addition to the consumer credit variable, a selection of other variables was chosen to provide a profile of the households taking part in the survey and which may, it is believed, shed light on the total amount of debt outstanding (paragraph 5.2; appendix: table 1). The data was therefore reprocessed in order to determine the percentage of households with unsecured debt in relation to the socio-economic characteristics mentioned previously (appendix: table 2)2. With regards exclusively to households
To provide the analysis with a sufficient number of households, the entire sample of households interviewed in 2004 was used rather than the households belonging to previous years household panel surveys. (The same families interviewed in previous panel waves in 2002 and 2004 numbered only 3604 in comparison to an entire 2004 sample total of 8012). As the demand for credit is influenced by current income when this is lower than permanent income, panel analysis would have provided data for the study also of the effect of permanent income and not only of current income: by using panel survey data, single household income changes can be monitored over time and consequently permanent income can be calculated more accurately. Indicators estimating permanent income in non-panel based models used by Cox and Jappelli (1993) and Ferri and Simon (2002) will play an important part in the ongoing development of the present research. 2 The probability of indebtedness was calculated with reference to each chosen variable. For instance, with regards to the gender variable, the number of households with a man as head of household and those in which a woman is the head of household were calculated (column 6); subsequently, the percentage of households with consumer liabilities belonging to these two sub-groups was calculated
1

with consumer credit liabilities, the same methodology was used to identify the average amount of debt outstanding by household type (appendix: table 3). Although the analysis carried out is descriptive and does not take into account the relations between variables, the evidence produced offers the grounds for further research and allows for a detailed analysis of the question of territorial specificity. 4.2 Variables used The variables used in tables 2 and 3 are prevalently socio-demographic and economic, such as age (CLETA), professional qualifications (QUAL), education (STUDIO), income (Y) and wealth (W), which provide a profile of the households taking part in the research and which are those commonly used in the literature as consumer credit determinants (appendix: table 1). Amongst household-related factors, the inclusion of a qualitative variable describing a households financial situation (SITFIN) was considered particularly useful. This provides a measure of whether at the end of the year a household had managed to balance income and consumption, to save or had to borrow. Together with the quantitative income variable (Y), SITFIN can provide insights as to whether consumer credit is used to avoid spending restraints or to smooth intertemporal consumption. With this in mind, the analysis also utilised a variable as a lifestyle proxy: (VAC) indicates whether a household has taken a holiday (1) or not (0). Institutional-related factors are combined in a variable indicating the number of banks with which a household holds a current account (NBANC); this variable is used as a proxy for lenders (banks and finance companies) capacity to access full information about borrowers. An indicator of recourse to informal credit circuits (DEBIT) was also used to establish the possible effect of loans from family and friends on the diffusion of formal unsecured debt solutions. The indicator of a legal systems efficiency was not used in the analysis given that in Italy this factor prevalently influences the decision to repay secured debt, such as mortgage loans, rather than consumer credit liabilities. 4.3 Results In line both with theory and previous research, consumer liabilities are concentrated principally amongst younger households (CLETA), which borrow in order to smooth consumption over their life cycle and by so doing achieve lifestyle improvements. Education (STUDIO) however does not appear to be a particularly significant variable
(column 2). In columns 3, 4 and 5 the same data was then broken down by geographical area (North, Centre and South).

in contrast to both what is normally expected and the findings presented in the literature, which typically report higher levels of education as an effective proxy of rising future income and consequently positively correlated to the amount of debt outstanding. It may be posited, however, that the limited importance of education as a variable is a specific feature of consumer credit. Higher education levels presumably equip individual borrowers with the necessary skills to evaluate and select financial products and services more effectively. The education variable, it can be suggested, has a greater impact when dealing with more sophisticated and complex financial products involving higher sums of money, such as mortgage loans, rather than comparatively simple consumer credit solutions characterised by lower amounts borrowed, easier to understand formalities, and wider availability (not only at banks and finance companies, but also directly at retail outlets for specific product purchases). The percentage of households with unsecured debt is higher amongst the lower net wealth bracket (W), consistent with the evidence in the literature, showing that households with high net wealth are able to cover consumption needs autonomously without recourse to debt. The analysis, furthermore, shows that income (Y) positively impacts both the likelihood of indebtedness and the average amount borrowed; this may also be due to the reduced probability of supply-side restrictions. Interestingly, the variable describing households financial situation (SITFIN) negatively impacts the likelihood of indebtedness and the average amount borrowed therefore showing that a segment of the population uses consumer credit to square its balance sheet positions. This condition may indicate financial difficulties stemming from an inability to cover current expenditure from existing income. Clearly, the build up of household over indebtedness requires careful monitoring not only on the part of the banking system for the potentially negative effects on the credit quality of its retail loan portfolio, but also by policy makers in general for the wider social and economic repercussions the phenomenon might have. Raised awareness of the situation is justified by elaboration of the professional qualification variable (QUAL): a not insignificant number of unemployed borrowers have sizeable average liabilities. Analysis of the institutional factors impacting on the size of consumer liabilities produces interesting results. The NBANC variable positively raises the likelihood of indebtedness and the average amount borrowed: an increase in the number of lenders (banks and finance companies) a household uses is tracked by an increase in the total amount of consumer liabilities outstanding. This evidence is also in line with the literature on household debt and can be explained by the fact that individual lenders have a partial view of the customers total liabilities. The informal credit market, in the present research expressed by the quantity of loans granted by family and friends (DEBIT), appears to raise the likelihood of indebtedness.

10

The evidence discussed so far referring to Italy as a whole (column 2 of tables 2 and 3) confirms that the factors driving demand for unsecured debt are substantially those already discussed in the literature. However, findings from this research show a group of low income and low wealth households using more than one lender to compensate for inadequate income. Is this type of household concentrated more in the South in comparison to other parts of the country? The indicator of households geographical location illustrates relative homogeneity in the geographical distribution of unsecured debt: total outstanding liabilities assignable to households in the South of Italy are not substantially different from those in other parts of the country. Using this evidence as a platform, in order to examine the question of territorial specificity in more detail, an analysis was carried out of the data specific to each geographic area (columns 3, 4 and 5 of tables 2 and 3). The results highlight features of territorial specificity which are of particular interest in that they differ from the initial view that relative poverty indicators for the South reveal a state of potential difficulty. On the basis of the fact that total consumer liabilities per capita do not differ significantly from other parts of the country, recourse to credit in the South of Italy was considered to be a means of alleviating conditions of financial difficulties. The picture that, however, emerges from the analysis is that, in line with the position broadly accepted in the literature, consumer credit in the South is used to smooth intertemporal competition and lifestyles rather than reflecting conditions of over indebtedness. Figures show in fact that in the South consumer credit is concentrated amongst households with higher levels of education: almost 40 per cent of principal income providers of households using consumer credit are university graduates or have at least successfully completed high school, in comparison to 28 per cent for the North and Centre. Furthermore, the average amount of loans is greater for those households with higher levels of education. Also significant is the fact that in the South the percentage of households with unsecured debt in which the principal income provider is unemployed is lower than in other areas of the country. When this situation arises, the average total of liabilities is relatively low. With reference to the income and wealth variables, consumer credit is principally concentrated in the South amongst households in the last tertial, i.e. those with the highest income and wealth levels. In the North of Italy, however, consumer credit use is mainly concentrated amongst households with lower levels of education and professional qualifications and, in comparison to the South, more indebted households have low income and wealth levels. The variable indicating households financial situation confirms that a higher number of households in the North of Italy use debt as a means of squaring their balance sheets. In contrast to the initial hypothesis, it is therefore likely that most households with excessive debt levels are to be found in this part of the country.

11

5. Conclusion According to theory, households are able to borrow against expected future income and so the demand for credit is higher amongst younger age groups with higher levels of education and therefore enhanced expectations of higher future income receipts. Similar high demand for credit is also expected from households with professional qualifications and/or higher current income; two factors that make access to borrowing easier. On the other hand, some sections of the population utilise unsecured debt as a means of integrating income and covering basic needs. This paper has investigated the factors that determine the diffusion of consumer credit and the specific features that distinguish one area of the country from another. On the basis of the evidence produced by the research, two major aspects emerge, which provide a different perspective of the territorial features of the Italian market and also offer a useful starting point for further research. First, demand for consumer credit in the South does not appear to be concentrated amongst low income and low wealth households. Indeed, consistent with the life-cycle/permanent income model, debt is principally used by households to smooth intertemporal income and consumption in order to improve their overall economic condition. These households do not appear to have specific difficulties in meeting debt repayments. Second, in the north of Italy, however, a more careful monitoring of debt levels and distribution is required given the significant amount of consumer liabilities held by households in financial difficulty, which use debt recurrently to integrate monthly pay cheques and maintain living standards. This can result in their being exposed to excessively high levels of indebtedness. Another question to be addressed is the extent to which the spatial distribution of consumer credit is influenced by supply-side factors. Indeed, access to credit in the South of Italy may be more difficult as a result of the greater risks the area presents, which consequently force lenders to reduce the supply of credit and/or apply more severe pricing policies for marginal segments of the population, reserving supply to prime borrowers, i.e. those with higher credit ratings. Bearing this in mind, it is reasonable to posit that consumer credit aggregates have been influenced by the strategies adopted by major banking groups in their penetration and consolidation of the southern Italian market. In fact, over the last few years there have been considerable and deep-seated changes to banking in the South, with banks from the North and Centre playing a dominant role (Bongini and Ferri 2005). The process of aggregation via merger and acquisition may initially have led to a dispersion of information concerning local borrowers and the loosening of ties with some parts of the traditional customer base, negatively impacting in particular local enterprises. Consequently, banks new to the area may have concentrated on those

12

segments of the credit market, typically lending to households, where credit scoring procedures are standardised and apparently more efficient. It appears likely that the convenience of such a choice was confirmed by a favourable combination of advantageous lending rates on unsecured debt and relatively low credit risk levels, which led banks to focus lending on households. The logical continuation of this work should be an analysis of the interactions between credit supply strategies and the differences in borrowers behavioural patterns from one geographical area to another. It is hoped that such research will shed light on the structure and competitive nature of the Italian consumer credit market.

13

6. References

Alessie R., M.P. Devereux, G. Weber (1997), Intertemporal consumption, durables and liquidity constraints: a cohort analysis, in European Economic Review, vol. 41, n.1 Attanasio O. (1999), Consumption, in Handbook of Macroeconomics, vol.1, ed. J.B. Taylor and M. Woodford, Elsevier Science Avery R.B., P.S. Caleman, G.B. Canner (2004), Consumer credit scoring: do situational circumstances matter? in Bank for International Settlements, Working Papers, no. 146. Banca dItalia (2006), Survey on Household income and Wealth 2004, Supplements to the Statistical Bulletin, n.7 Bongini P., G. Ferri (2005), Il sistema bancario meridionale, Editori Laterza Boyes W.J., D.L. Hoffman, S.A. Law (1989), Econometric analysis of bank scoring problems, in Journal of Econometrics, vol. 40 Casolaro L., L. Gambacorta, L. Guiso (2006), Regulation, formal and informal enforcement and the development of the household loan market. Lesson from Italy, in Bertola G., Disney R., Grant C. (eds) The economics of consumer credit, Cambridge, MIT Press Cox D., T. Jappelli (1993), The effect of borrowing constraints on consumer liabilities, in Journal of Money Credit and Banking, vol. 25, n.2 Crook J. (2005), The measurement of household liabilities: conceptual issues and practices, Credit research Centre, working paper, University of Edinburgh Crook J. (2003), The demand and supply for household debt: a cross country comparison, Credit research Centre, working paper, University of Edinburgh Crook J., S. Hochguertel (2006), Household debt and credit constraints: comparative micro evidence from four OECD countries, Finance and Consumption Workshop, European University Institute, Florence, 12 June

14

Deaton A. (1992), Understanding consumption, Oxford University Press Del-Rio, A., G. Young, (2005), Unsecured debt in BHPS: determinants and impact on financial distress, Bank of England, working paper no. 263 Duygan B., C. Grant (2006), Household debt and arrears: what role do institutions play?, Preliminary draft presented at the Finance and Consumption Internal seminars, European University Institute. ECRI (2005), Consumer credit in Europe ECRI Statistical package, CEPS Bookshop, www.ceps.be Fabbri D., M. Padula (2004), Does poor legal enforcement make households credit constrained?, in Journal of Banking and Finance, n.28 Fay S., E. Hurst, M. White (2002), The household bankruptcy decision, in The American Economic Review, vol.92, n.3 Ferri G., P. Simon (2000), Constrained consumer lending: methods using the survey of consumer finances, working paper, University of Bari Filotto U. (1999), Manuale del credito al costume, Egea Grant C. (2003), Estimating credit constraints among US households, working paper, European University Institute, Florence Grant C., M. Padula (2006), Informal credit markets, judicial costs and consumer credit: evidence from firm level data, CSEF Centre for Studies in Economics and Finance, working paper n.155. Guiso L., P. Sapienza, P. Zingales (2004), Does financial development matter?, in Quarterly Journal of Economics, vol. 119, n.3 Jappelli T., M. Pagano (2002), Information sharing, lending and defaults: crosscountry evidence, in Journal of Banking and Finance, n.10 Jappelli T., M. Pagano (2006), The role and effects of credit information sharing, in Bertola G., R. Disney, C. Grant (edited by) The economics of consumer credit, Cambridge, MIT Press.

15

Magri S. (2002), Italian households debt: determinant of demand and supply, Banca dItalia, Temi di discussione, n.454 Rinaldi L., A. Sanchez-Arellano (2006), Household debt sustainability. What explains household non-performing loans? An empirical analysis, European Central Bank, working paper, n.570

16

7. Appendix
TABLE 1. Database variables and principal descriptive statistics Table 1 illustrates the statistical characteristics of the variables used in the analysis. The database refers to 2004: 8,012 households, 20,581 persons, of which 13,341 salary earners. CRED_CONS is the total amount of household liabilities payable to banks and finance companies for the purchase of real goods, motor cars and bikes, bicycles, furniture, electrical appliances and non durables. CLETA is the variable indicating the age group of a households principal income provider (capofamiglia) with values assignable to each age group as follows: up to 30 years of age (value of 1); from 31 to 40 (value of 2); from 41 to 50 (value of 3); from 51 to 65 (value of 4); over 65 (value of 5). NCOMP: the number of household members. NPERC: the number of household members earning an income. QUAL is the variable indicating the professional qualifications of salary earners, with values assignable to each group as follows: unemployed principal income provider (value of 1); salaried employee (value of 2); self-employed (value of 3). AREA3 is the variable indicating the geographical area with the following values: North (value of 1); Centre (value of 2); South (value of 3). STUDIO is the variable indicating the education level of the households principal income provider, with values assignable to each group as follows: no educational qualification (value of 1); completed only primary school (value of 2); completed junior high school at the age of 14 (now 15) (value of 3); technical/professional school leaving diploma e.g. nursing, etc. (value of 4); high school leaving diploma (value of 5); university diploma (value of 6); university degree (value of 7); post-graduate qualification (value of 8). VAC is the variable indicating whether the household took a holiday or day trips during 2004; 1 indicates that it did, whilst 0 indicates that it did not. SITFIN is the variable describing the households current financial situation. The following values were assigned to households describing their financial situation in the following ways: have to borrow (value of 1); have to use savings (value of 2); just about manage to make ends meet (value of 3); manage to save something (value of 4); manage to save a fair amount (value of 5). Y is the available income variable. Distribution is divided into tertials and the variable was adjusted as follows: income up to 18,000 (value of 1); income from 18,000 to 31,000 (value of 2 ); income over 31,000 (value of 3). W is the net wealth variable, also adjusted into classes: net wealth up to 20,000 (value of 1); net wealth from 20,000 to 165,000 (value of 2); net wealth above 165,000 (value of 3). NBANC is the variable indicating the number of current accounts, if any, held by the households principal income provider with the following values assigned: no current account (value of 1); one current account (value of 2); current account held in more than one bank (value of 3). Variables (symbols used) Average St. Dev. Min Max

CRED_CONS CLETA

884.2 * 56.8

3,712.9 15.8

0 18

100,000 97

17

NCOMP NPERC QUAL AREA3 STUDIO VAC SITFIN Y W NBANC

2.6 1.6 n.a. n.a. n.a. n.a. n.a. 29,866.6 165,192.3 n.a.

1,3 0.7 n.a. n.a. n.a. n.a. n.a. 26,931.0 315,300.1 n.a.

1 1 1 1 1 0 1 -41,575.16 -220,000 0

9 7 7 3 8 1 5 1,022,616.85 9,660,113 2

* The average value takes into account also households without consumer liabilities. The average value calculated on the number of households with consumer liabilities only (1,034 households out of a total of 8,012) 6,853.60.

18

Table 2. Percentage of households with unsecured debt in relation to their socio-economic characteristics (all households interviewed)

Total
(%) Geographical area
(AREA3)

North
(%)

Centre
(%)

South
(%)

Number of households interviewed

3,819 1,628 2,564

North Centre South Gender Male Female Age group (CLETA) Under 30 From 31 to 40 From 41 to 50 From 51 a 65 Over 65 Educational qualification
(STUDIO)

13.1% 14.5% 11.5%

13.1% -

14.5% -

11.5%

14.4% 10.5%

14.7% 10.5%

16.5% 11.5%

12.6% 10.0%

4,902 3,110

21.1% 19.3% 20.8% 12.1% 2.8%

23.6% 20.9% 21.6% 9.4% 2.5%

15.7% 21.6% 20.9% 16.4% 3.8%

20.3% 14.8% 19.3% 13.1% 2.8%

413 1,446 1,667 2,091 2,395

No educational qualification Primary school certificate Middle school certificate Professional school diploma High school diploma University diploma University degree Post-graduate qualification Work status (QUAL) Unemployed Payroll employee Self-employed

6.2% 5.7% 14.4% 16.0% 19.9% 9.1% 12.2% *

3.3% 5.4% 14.7% 16.7% 18.8% * 10.9% *

6.3% 6.3% 17.9% 17.9% 21.0% * 9.6% *

6.9% 5.8% 12.0% 10.4% 20.8% * 18.1% *

504 2,112 2,305 474 1,950 54 591 22

10.8% 16.5% 19.9%

11.1% 16.2% 19.6%

12.3% 19.8% 14.2%

9.4% 14.4% 27.3%

5,410 1,933 669

19

Holidays (VAC) Yes No Number of banks used (NBANC) Without a current account With a current account at one bank With a current account at more than one bank Informal credit circuit (DEBIT) Yes No Household size
(NCOMP)

17.6% 9.9%

16.5% 9.3%

18.8% 12.2%

21.1% 9.4%

3,092 4,920

6.4% 14.1% 20.2%

10.9% 12.8% 16.7%

5.1% 15.6% 26.9%

5.6% 15.8% 27.2%

1,871 5,321 820

20.9% 12.8%

34.8% 12.7%

* *

3.3% 11.7%

139 7,873

1 member 2 members 3 members 4 members More than 4 members Number of of earners (NPERC) 1earner 2 earners 3 earners More than 3 earners Tertials of households income
(Y)

7.1% 9.9% 17.6% 18.7% 14.8%

9.1% 10.4% 18.5% 16.7% 16.1%

5.8% 10.1% 19.0% 27.9% 20.3%

4.4% 8.8% 15.1% 16.5% 12.8%

1,973 2,239 1,700 1,568 532

9.6% 15.5% 16.5% 25.7%

10.3% 16.0% 12.3% 16.9%

16.0% 16.5% 17.9% 38.6%

12.3% 14.0% 23.7% 27.3%

3,975 3,159 699 179

Up to 18,000 From 18,000 to 31,000 Over 31,000 Tertials of households net wealth (W) Up to 20,000 From 20,000 to

7.3% 13.5% 17.5%

8.6% 13.1% 15.7%

6.4% 13.9% 19.2%

6.6% 13.7% 21.8%

2,572 2,630 2,810

14.1% 11.8%

16.2% 12.8%

13.9% 13.7%

11.6% 9.8%

2,691 2,700

20

165,000 Over 165,000 Financial situation

(SITFIN)

12.8%

10.7%

15.4%

14.7%

2,621

Need to borrow 24.7% 37.5% 37.5% Need to withdraw 11.2% 13.7% 18.7% from savings Just about manage 12.0% 13.0% 12.7% to make ends meet Manage to save a 14.5% 13.1% 16.3% little Manage to save a 7.8% 6.3% 4.9% fair amount Source: our computations on Bank of Italys SHIW , 2006 insufficient number of respondents to carry out analysis

14.6% 6.1% 10.5% 16.4% 15.9%

271 680 4,226 2,399 436

21

Table 3. Average amount of unsecured debt held by households in relation to their socioeconomic characteristics (households with unsecured debt liabilities only)

Total
(euro)

North
(euro)

Centre
(euro)

South
(euro)

Number of households with unsecured debt

502 236 295

Geographical area
(AREA3)

North Centre South Gender Male Female Age group (CLETA) Under 30 From 31 to 40 From 41 to 50 From 51 a 65 Over 65 Educational qualification
(STUDIO)

7,258.4 5,964.1 6,877.1

7,258,4 -

5,964,1 -

6,877,1

7,470.9 5,528.1

8,017,5 5,442,7

5,824,9 6,256,3

7,837,7 5,116,1

705 328

7,400.3 7,219.2 6,577.9 6,944.0 5,721.1

724,3 8,345,6 6,348,7 7,284,1 *

* 6,031,3 6,852,8 5,894,7 *

* 5,729,4 6,816,4 7,465,8 *

88 279 347 252 68

No educational qualification Primary school certificate Middle school certificate Professional school diploma High school diploma University diploma University degree Post-graduate qualification Work status (QUAL) Unemployed Payroll employee Self-employed

3,058.2 6,917.0 7,761.9 5,871.0 6,154.1 * 8,033.8 *

* 7,534,8 8,418,9 5,811,1 6,152,7 * 7,951,8 *

* * 7,522,4 * 4,957,8 * * *

* 7,220,5 6,704,3 * 7,256,8 * 9,140,6 *

31 121 334 76 388 6 72 7

6,766.5 6,166.3 8,875.8

7,712,3 5,766,7 8,875,3

6,315,5 5,276,2 *

5,590,1 7,936,1 10,417,3

582 318 133

22

Holidays (VAC) Yes No Number of banks used (NBANC) Without a current account With a current account at one bank With a current account at more than one bank Informal credit circuit (DEBIT) Yes No Household size
(NCOMP)

6,913.0 6,787.2

6,751,0 8,286,6

6,103,7 5,843,6

8,352,3 6,127,0

545 488

4,953.4 6,873.6 8,144.3

3,161,0 7,270,3 8,820,0

* 5,852,5 7,143,4

6,070,9 7,033,7 7,623,0

121 747 166

* 6,959.1

* 7,456,8

* 5,987,5

* 6,920,8

29 1,004

1 member 2 members 3 members 4 members More than 4 members Number of of earners (NPERC) 1earner 2 earners 3 earners More than 3 earners Tertials of households income
(Y)

5,826.2 6,127.8 7,910.7 6,809.0 6,880.3

5853.8 6,663.5 8,290.2 7,715.0 *

* 4,400.4 7,323.1 5,731.7 *

* 6,248,6 7,650,8 6,743,5 7,163,4

140 222 299 294 78

5,827.8 7,568.2 7,361.2 6,438.6

5,878.3 8,059.2 8,023.0 *

5,636.2 6,705.1 5,431.8 *

5,886.5 7,195.4 8,076.6 *

381 492 115 46

Up to 18,000 From 18,000 to 31,000 Over 31,000 Tertials of households net wealth (W) Up to 20,000

4,790.9 6,570.4 7,840.9

3,461.3 8,002.1 7,913.1

* 5,652.7 6,149.3

5,626.1 5,108.7 9,784.3

187 354 493

7,827.0

8,162.0

6,746.4

7,813.2

380

23

From 20,000 to 165,000 Over 165,000 Financial situation

(SITFIN)

6,225.1 6,345.0

6,57.,5 6,719.3

5,785.0 5,630.5

6,003.5 6,617.4

319 335

Need to borrow Need to withdraw from savings Just about manage to make ends meet Manage to save a little Manage to save a fair amount

10,998.7 7,127.3 6,027.0 6,889.7 9,929.8

15,120.7 7,016.4 5,996.1 7,445.0 *

* * 6,138.7 5,319.3 *

* * 5,997.3 7,326.9 *

68 76 509 347 34

Source: our computations on Bank of Italys SHIW, 2006 * insufficient number of respondents to carry out analysis

24