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Research articles · Dec 31, 2014

A microsimulation model to evaluate Italian households’ financial vulnerability

Valentina Michelangeli, Mario Pietrunti

Institute Bank of Italy, Financial Stability Directorate, Via Nazionale, Italy

Volume 7(3) Winter 2014

Cite as: V. Michelangeli, M. Pietrunti; 2014; A microsimulation model to evaluate Italian households’ financial vulnerability; International Journal of Microsimulation; 7(3); 53–79. doi: 10.34196/ijm.00107

Abstract

We build a microsimulation model to monitor the financial vulnerability of Italian households. Starting from household-level data from the Survey on Household Income and Wealth and matching them with macroeconomic forecasts on debt and income, we project the future path of households’ indebtedness and debt-service ratio. This allows us to assess households’ vulnerability at a higher frequency and in a more timely manner than by using household data alone. We find that the share of vulnerable households (defined as those with a debt-service ratio above 30 per cent and income below the median) over the total population is projected to be about stable between 2012 and 2014, with a slight decrease in 2015 due to positive income growth. Their debt is also projected to decrease in those years. Overall, we find that the dynamics of income growth are the main driver of households’ vulnerability.

This article contains 18 figures and 17 tables.

Figures

Figure 1. Percentage of vulnerable households in the population.
Figure 2. Percentage of vulnerable households with income below the median.
Figure 3. DSR Distribution.
Figure 4. Percentage of vulnerable households in the population.
Figure 5. Percentage of vulnerable households with income below the median in total households.
Figure 6. Percentage of debt held by all vulnerable households.
Figure 7. Percentage of vulnerable households under alternative scenarios.
Figure 8. Percentage of vulnerable households with income below the median under alternative scenarios.
Figure 9. Percentage of total debt held by vulnerable households with income below the median.
Figure 10. Percentage of vulnerable households with DSR above 40%.
Figure 2.2. Percentage of vulnerable households over total population.
Figure 2.2. Percentage of vulnerable households with income below the median over total population.

Tables

Table 1. Macroeconomic aggregates (Percentages).
2013 2014 2015
Income growth rate at current prices (national accounts) 0.1 2.4 2.9
Total debt growth (macro model for forecasting debt growth) -1.0 -0.3 1.8
Euribor (3m Euribor and 3m Euribor futures) 0.21 0.27 0.32
Euribor change -0.65 0.06 0.05
Table 2. Estimated mean and standard deviation for the income process.
yd growth y growth
μd σd μ σ
1st – 25th percentile 0.035 0.034 0.039 0.025
25th – 50th percentile 0.029 0.023 0.029 0.025
50th – 75th percentile 0.026 0.026 0.025 0.023
75th – 100th percentile 0.025 0.024 0.023 0.024
Table 3. Adjustment factors for households’ income.
2013 2014 2015
Adjustment factor 0.974 0.970 0.971
Table 4. Income growth (Percentages).
2013 2014 2015
National accounts 0.1 2.4 2.9
Model 0.1 2.4 2.9
Table 5. Total debt growth (Percentages).
2013 2014 2015
Macro -1.0 -0.3 1.8
Model with originations -1.0 -0.3 1.8
Model without originations -5.1 -5.7 -6.1
Table 6. Percentage of vulnerable households by age, education and occupation (Mean values).
2012 2013 2014 2015 Total population (2012)
Age
                 < 35 16.8 14.2 12.9 10.7 9.5
                 35–44 33.5 31.1 29.3 28.9 20.2
                 45–54 28.4 32.7 35.0 35.7 21.3
                 55–64 9.4 9.6 11.0 12.2 16.2
                 > 65 11.9 11.9 11.3 12.1 32.8
Education
                 No education or primary education 6.2 6.3 6.3 6.1 23.3
                 Lower secondary education 39.7 38.4 38.3 36.0 35.8
                 Upper secondary education 39.7 40.7 41.2 45.3 27.8
                 Undergraduate or post-graduate 14.5 14.8 14.4 13.6 13.1
Occupation
                 Not working 16.0 15.7 15.1 14.4 41.0
                 Working 84.0 84.2 84.4 85.4 59.0
Table 7. Percentage of vulnerable households under alternative scenarios.
2012 2013 2014 2015
Baseline Suspension of payments Interest rate shock Income shock
Central estimate 4.8 4.6 4.4 4.4 4.3 4.6 4.7
10th-90th percentiles -- 4.5–4.7 4.3–4.6 4.3–4.5 4.2–4.5 4.5–4.7 4.6–4.8
Table 8. Percentage of vulnerable households with income below the median under alternative scenarios.
2012 2013 2014 2015
Baseline Suspension of payments Interest rate shock Income shock
Central estimate 2.9 2.9 2.8 2.7 2.6 2.9 3.0
10th-90th percentiles -- 2.9–3.0 2.6–2.9 2.7–2.9 2.6–2.8 2.7–3.0 2.9–3.1
Table 1.
2012 2013 2014 2015
Percentage of vulnerable households over total households
    1st–25th percentile 1.5 1.6 1.6 1.6
    25th–50th percentile 1.4 1.4 1.2 1.1
    Below the median 2.9 2.9 2.8 2.7
    50th–75th percentile 1.2 1.0 0.9 0.8
    75th–100th percentile 0.7 0.7 0.7 0.8
    TOTAL 4.8 4.6 4.4 4.4
Percentage of vulnerable households over indebted households
    1st–25th percentile 7.6 7.4 6.8 6.7
    25th–50th percentile 7.0 6.3 5.2 4.6
    Below the median 14.6 13.6 12.0 11.2
    50th–75th percentile 6.0 4.4 3.8 3.3
    75th–100th percentile 3.5 3.0 3.2 3.3
    TOTAL 24.1 21.2 19.1 18.1
Percentage of debt held by vulnerable households
    1st–25th percentile 9.5 10.4 9.7 9.2
    25th–50th percentile 10.2 9.1 7.9 7.0
    Below the median 19.7 19.3 17.4 16.0
    50th–75th percentile 7.9 6.4 5.9 5.2
    75th–100th percentile 9.8 9.1 8.7 8.2
    TOTAL 37.5 34.7 31.8 29.5

Note: Households are divided into classes according to their equalized income gross of imputed rents. The reported values have been approximated to the first decimal.

Table 2.
2012 2013 2014 2015
Percentage of vulnerable households over total households
    1st–25th percentile 1.5 1.6 1.5 1.6
    25th–50th percentile 1.4 1.3 1.2 1.1
    Below the median 2.9 2.9 2.7 2.6
    50th–75th percentile 1.2 1.0 0.9 0.8
    75th–100th percentile 0.7 0.7 0.7 0.8
    TOTAL 4.8 4.5 4.3 4.3
Percentage of vulnerable households over indebted households
    1st–25th percentile 7.6 7.2 6.5 6.4
    25th–50th percentile 7.0 6.2 5.2 4.4
    Below the median 14.6 13.3 11.6 10.9
    50th–75th percentile 6.0 4.4 3.8 3.3
    75th–100th percentile 3.5 3.0 3.2 3.3
    TOTAL 24.1 20.9 18.8 17.8
Percentage of debt held by vulnerable households
    1st–25th percentile 9.5 10.1 9.1 8.8
    25th–50th percentile 10.2 8.9 7.9 6.8
    Below the median 19.7 18.7 16.7 15.4
    50th–75th percentile 7.9 6.4 5.9 5.2
    75th–100th percentile 9.8 9.1 8.7 8.2
    TOTAL 37.5 34.0 31.4 29.1
Table 3.
2012 2013 2014 2015
Percentage of vulnerable households over total households
    1st–25th percentile 1.5 1.6 1.6 1.7
    25th–50th percentile 1.4 1.4 1.2 1.2
    Below the median 2.9 2.9 2.8 2.9
    50th–75th percentile 1.2 1.0 0.9 0.9
    75th–100th percentile 0.7 0.7 0.7 0.8
    TOTAL 4.8 4.6 4.4 4.6
Percentage of vulnerable households over indebted households
    1st–25th percentile 7.6 7.4 6.8 6.9
    25th–50th percentile 7.0 6.3 5.2 4.9
    Below the median 14.6 13.6 12.0 11.8
    50th–75th percentile 6.0 4.4 3.8 3.5
    75th–100th percentile 3.5 3.0 3.2 3.4
    TOTAL 24.1 21.2 19.1 19.0
Percentage of debt held by vulnerable households
    1st–25th percentile 9.5 10.4 9.7 9.7
    25th–50th percentile 10.2 9.1 7.9 7.6
    Below the median 19.7 19.3 17.4 17.1
    50th–75th percentile 7.9 6.4 5.9 5.7
    75th–100th percentile 9.8 9.1 8.7 8.7
    TOTAL 37.5 34.7 31.8 31.4
Table 4.
2012 2013 2014 2015
Percentage of vulnerable households over total households
    1st–25th percentile 1.5 1.6 1.6 1.7
    25th–50th percentile 1.4 1.4 1.2 1.3
    Below the median 2.9 2.9 2.8 3.0
    50th–75th percentile 1.2 1.0 0.9 0.9
    75th–100th percentile 0.7 0.7 0.7 0.7
    TOTAL 4.8 4.6 4.4 4.7
Percentage of vulnerable households over indebted households
    1st–25th percentile 7.6 7.4 6.8 6.9
    25th–50th percentile 7.0 6.3 5.2 5.4
    Below the median 14.6 13.6 12.0 12.3
    50th–75th percentile 4.0 4.4 3.8 3.8
    75th–100th percentile 3.5 3.0 3.2 3.0
    TOTAL 24.1 21.2 19.1 19.3
Percentage of debt held by vulnerable households
    1st–25th percentile 9.5 10.4 9.7 9.5
    25th–50th percentile 10.2 9.1 7.9 8.0
    Below the median 19.7 19.3 17.4 17.3
    50th–75th percentile 7.9 6.4 5.9 5.5
    75th–100th percentile 9.8 9.1 8.7 8.2
    TOTAL 37.5 34.7 31.8 31.2
Table 4.
2012 2013 2014 2015
Percentage of vulnerable households over total households
    1st–25th percentile 1.0 1.0 1.0 1.0
    25th–50th percentile 0.6 0.6 0.5 0.5
    Below the median 1.6 1.6 1.5 1.4
    50th–75th percentile 0.4 0.3 0.3 0.3
    75th–100th percentile 0.3 0.3 0.3 0.3
    TOTAL 2.3 2.2 2.1 2.1
Percentage of vulnerable households over indebted households
    1st–25th percentile 4.8 4.5 4.2 4.1
    25th–50th percentile 3.1 2.7 2.2 1.9
    Below the median 7.9 7.3 6.4 5.9
    50th–75th percentile 2.1 1.6 1.3 1.2
    75th–100th percentile 1.5 1.3 1.3 1.3
    TOTAL 11.5 10.2 9.2 8.5
Percentage of debt held by vulnerable households
    1st–25th percentile 6.6 6.9 6.3 5.8
    25th–50th percentile 4.9 4.2 3.6 3.0
    Below the median 11.5 11.1 9.9 8.6
    50th–75th percentile 3.4 3.0 2.5 2.1
    75th–100th percentile 3.3 3.1 3.1 2.9
    TOTAL 18.2 17.1 15.7 13.8
Table 5.
2012 2013 2014 2015
Percentage of vulnerable households over total households
    1st–25th percentile 1.5 1.6 1.4 1.3
    25th–50th percentile 1.4 1.4 1.2 1.0
    Below the median 2.9 2.9 2.6 2.3
    50th–75th percentile 1.2 1.0 0.9 0.8
    75th–100th percentile 0.7 0.7 0.7 0.8
    TOTAL 4.8 4.6 4.3 4.0
Percentage of vulnerable households over indebted households
    1st–25th percentile 7.6 8.0 7.5 7.0
    25th–50th percentile 7.0 6.9 6.1 5.1
    Below the median 14.6 14.7 13.5 12.1
    50th–75th percentile 6.0 4.8 4.5 4.2
    75th–100th percentile 3.5 3.3 3.7 4.1
    TOTAL 24.1 23.0 21.9 20.8
Percentage of debt held by vulnerable households
    1st–25th percentile 9.5 10.7 10.1 9.7
    25th–50th percentile 10.2 9.4 8.6 7.4
    Below the median 19.7 19.9 18.3 16.9
    50th–75th percentile 7.9 6.7 6.5 6.1
    75th–100th percentile 9.8 9.4 9.6 9.7
    TOTAL 37.5 35.9 34.1 32.8
Table 6.
2012 2013 2014 2015
Percentage of vulnerable households over total households
    1st–25th percentile 1.5 1.6 1.6 1.6
    25th–50th percentile 1.4 1.3 1.2 1.1
    Below the median 2.9 2.9 2.7 2.7
    50th–75th percentile 1.2 0.9 0.9 0.8
    75th–100th percentile 0.7 0.7 0.7 0.8
    TOTAL 4.8 4.5 4.4 4.4
Percentage of vulnerable households over indebted households
    1st–25th percentile 7.6 7.4 6.8 6.6
    25th–50th percentile 7.0 6.2 5.1 4.5
    Below the median 14.6 13.4 11.9 11.2
    50th–75th percentile 6.0 4.2 3.8 3.3
    75th–100th percentile 3.5 3.0 3.1 3.3
    TOTAL 24.1 20.8 18.9 18.0
Percentage of debt held by vulnerable households
    1st–25th percentile 9.5 10.4 9.6 9.2
    25th–50th percentile 10.2 8.9 7.8 6.9
    Below the median 19.7 18.9 17.2 15.9
    50th–75th percentile 7.9 6.3 5.8 5.2
    75th–100th percentile 9.8 8.9 8.6 8.2
    TOTAL 37.5 34.2 31.3 29.3

Note: we randomly assigned a fraction of individuals declaring a fixed rate mortgage to hold a variable rate mortgage so that about 70 per cent of the mortgages are at variable rate. We also assume that the credit loans are adjustable rate.

Table 7. Estimated mean and standard deviation for the income process (SHIW 2008-2012).
yd growth y growth
μd σd μ σ
    1st – 25th percentile -0.020 0.040 -0.028 0.032
    25th – 50th percentile -0.014 0.029 -0.016 0.025
    50th – 75th percentile -0.014 0.036 -0.014 0.025
    75th – 100th percentile -0.010 0.029 -0.011 0.001
Table 8.
2012 2013 2014 2015
Percentage of vulnerable households over total households
    1st–25th percentile 1.5 1.6 1.7 1.8
    25th–50th percentile 1.4 1.4 1.3 1.2
    Below the median 2.9 3.0 3.0 3.0
    50th–75th percentile 1.2 0.9 0.9 0.8
    75th–100th percentile 0.7 0.7 0.7 0.7
    TOTAL 4.8 4.6 4.5 4.6
Percentage of vulnerable households over indebted households
    1st–25th percentile 7.6 7.5 7.3 7.3
    25th–50th percentile 7.0 6.4 5.5 4.9
    Below the median 14.6 13.9 12.8 12.4
    50th–75th percentile 6.0 4.4 3.8 3.4
    75th–100th percentile 3.5 3.0 2.9 3.0
    TOTAL 24.1 21.4 19.6 18.9
Percentage of debt held by vulnerable households
    1st–25th percentile 9.5 10.5 10.0 9.8
    25th–50th percentile 10.2 9.3 8.5 7.5
    Below the median 19.7 19.7 18.4 17.1
    50th–75th percentile 7.9 6.2 5.7 5.1
    75th–100th percentile 9.8 9.1 7.8 7.8
    TOTAL 37.5 35.0 32.0 30.2

Note: we randomly assigned a fraction of individuals declaring a fixed rate mortgage to hold a variable rate mortgage so that about 70 percent of the mortgages are at variable rate. We also assume that the credit loans are adjustable rate.