Determinants of Default Ratios in the Segment of Loans to Households in Spain

In this paper we present the estimation results of a dynamic panel data model that explains the dynamic behaviour of default ratios in Spain for loans extended to the household sector. We estimate the models for two alternative definitions of default and for two different loan categories. The dataset consists of a panel of 50 provinces and covers the period 1984-2009. The results of the models show that the dynamic behaviour of the default ratios of loans extended to Spanish households can be reasonably well characterised with the lagged LHS variable, and the contemporaneous and the lagged values of credit growth, the unemployment rate and the interest debt burden. We find that the increase in the unemployment rate was the main driver of the sharp rise in default ratios between 2007 and 2009 in Spain and that the fall in interest rates since the end of 2008 contributed to moderating the upward path of default ratios in 2009. We also find that there is strong evidence of asymmetrical effects of unemployment ratios on default ratios, and differences between banks and savings banks in their sensitivity to the cycle