Transmission channels from high household debt to bank losses
- Kasper Kragh-Sørensen and Haakon Solheim
- Staff Memo
We identify three transmission channels from high household debt to bank losses. Banks can incur losses on lending to households directly (direct channel), on lending to consumption-sensitive industries if traditional household demand declines (demand channel) or on lending to commercial property and construction if households reduce demand for housing (property channel). We regard the risk in the direct channel as small compared with the other two channels. We find that the importance of the property channel has increased, while the demand channel has become relatively less important. Our findings indicate that it is important to monitor developments in the property market closely to understand banks' vulnerabilities. This is in line with experience in Spain and Ireland in connection with the financial crisis in 2008-09.
Staff Memos present reports and documentation written by staff members and affiliates of Norges Bank, the central bank of Norway. Views and conclusions expressed in Staff Memos should not be taken to represent the views of Norges Bank.
ISSN 1504-2596 (online)