Title : Default Factors for Household Loans and Financial Fragility: The Importance of Self-Employed Borrowers in Korea Nations with US Patent Data, 1976-2015
Author : Hosung Jung (BOK)
This paper analyses the factors behind the loan defaults of households, including self-employed borrowers, using individual panel data held by the Bank of Korea and investigates financial sector fragility based on the expected loss at default (EAD) for individuals. Using data on personal loans and delinquencies, this study attempts to divide personal loan interest rates into a cost of funds index (Cofix) interest rates (common factor), and interest spreads determined based on loan characteristics and credit ratings (individual factors), and to examine how these factors determine the default probabilities (PDs) of self-employed and non-self-employed borrowers differently. It is found that the rises in the interest rate spreads determined by the lending institution and the loan type, and in interest rate spreads determined by the borrower’s credit rating, have bigger impacts on increases in the PDs of self-employed borrowers compared to non-self-employed borrowers. In addition, the financial sector’s expected loss ratio shows a downward trend in line with decreases in borrowers’ PDs, while the expected loss ratio of self-employed borrowers is found to be higher than that of non-self-employed borrowers. The financial sector interconnectedness of borrowers’ EADs increases for self-employed borrowers between some financial sectors. It is believed that our study may provide important information about sources of default risk for individuals, including self-employed borrowers, and about the interconnectedness of financial sector fragility.