FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.

posted on 19 June 2016

Do Demographics Affect Loan Delinquency?

from the St Louis Fed

Demographic characteristics such as age, education, and race or ethnicity are correlated with a host of economic and financial behaviors and outcomes, including borrowing and delinquency rates. If demographic factors truly didn't matter - if all individuals and families faced identical choices and opportunities in what we called a Demographics-Don't-Matter (DDM) framework - then these correlations simply might reflect a connection between differences in risk preferences and differences in age, education, and race or ethnicity.

Groups that more frequently miss loan payments, for example, might just prefer "living close to the edge" financially so that a given economic or financial shock is more likely to represent a tipping point into delinquency. In principle, any member of a delinquency-prone demographic group could mimic the behavior of families that aren't as likely to be delinquent; most simply choose not to do so.

An alternative approach to understanding demographic correlations with delinquency rates is to assume that all groups do not face identical choices and opportunities. Instead, for structural or historical reasons, some individuals and families may live with more risk than others.

Young people, for example, may face greater immediate financial challenges with higher stakes than do older people; those with low levels of education may face fewer economic opportunities than those with high skills; and black and Latino families may start their financial lives at an inherent disadvantage.

To proxy for these structural or systemic factors, we partition observable financial and nonfinancial choices and behaviors into peer-group effects and individual choices relative to those peer-group means. This is a Peer-Groups-Matter (PGM) framework.

Using Survey of Consumer Finances data for the period 1989-2013, we find limited support for the DDM hypothesis. In other words, if we assume that all families face the same opportunities and choices, then differences in a large set of observable financial and nonfinancial variables largely - but not completely - eliminate the role of demographic characteristics in predicting loan delinquency. Under this theoretical framework, groups with high delinquency risks have chosen to take on more risk; they could, if they chose, mimic low-risk groups and eliminate the gap in delinquency rates.

When we partition the potential explanatory variables into peer-group and idiosyncratic parts, we find strong support for a PGM hypothesis. Even after controlling for idiosyncratic choices of assets and liabilities, family structure and propensities to be lucky, a family's stage of life and whether it is black remain highly significant predictors of delinquency. Delinquency-prone demographic groups may face greater risk for structural or systemic reasons rather than simply having a taste for more risk.

The implications for research and policy are clear. The DDM framework that dominates research and most credit-market policies receives limited empirical support. Even controlling for "good vs. bad choices and behavior," being old is an advantage and being black is a disadvantage in credit markets.

The PGM framework that recognizes inherent differences in exposure to risk is strongly supported. Age and race matter; individual choices and behavior may not be enough to overcome them.

Research and policy that ignore these results subject some demographic groups to greater risk even while "blaming the victim." Future research and policy could usefully explore how framing of choice and opportunity affect our conclusions about how credit and other markets actually do and should operate.

Additional Resources

The above is the conclusion of the working paper "The Demographics of Loan Delinquency: Tipping Points or the Tip of the Iceberg?" byWilliam R. Emmons and Lowell Ricketts, both of the St. Louis Fed's Center for Household Financial Stability. This working paper was prepared for a conference called "America's Debt Problem: How Too Much Debt Is Hurting U.S. Household and Holding Back the U.S. Economy," to be held Thursday in New York.


Views expressed are not necessarily those of the Federal Reserve Bank of St. Louis or of the Federal Reserve System.


>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical News Post Listing

Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.

You can also comment using Facebook directly using he comment block below.

Econintersect Contributors


Print this page or create a PDF file of this page
Print Friendly and PDF

The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.

Take a look at what is going on inside of
Main Home
Analysis Blog
Run A High Pressure Economy? Janet Yellen Does Not Understand the Problem
Comments on Feyerabend’s ‘Against Method’, Part III
News Blog
How Miller Stacks Up Against His Draft Class
Inside The Machine: How Two Nobel Winners Taught Us How Companies Tick
Healthcare's Dirty Little Secret: Results From Many Clinical Trials Are Unreliable
The Cleveland Indian's Unique Use Of Andrew Miller
What We Read Today 26 October 2016
Why Do So Many Price Tags End In .99
September 2016 New Home Sales Improve.
Higher GDP Growth In The Long Run Requires Higher Productivity Growth
Quantum Encryption Is Secure Because Information Encoded In A Quantum Particle Is Destroyed As Soon As It Is Measured
The Stock Market Is Up, But Mutual Fund Investors Are Fleeing
Infographic Of The Day: Google's Hidden Games
Early Headlines: Asia Srocks Mostly Lower, Energy HY Bonds Surge, Google Fiber Cutback, Shadow Banks Dominate Mortgages, NATO Crowds Russia, Coffee Surges And More
Top 10 American Misconceptions about China (Version 3)
Investing Blog
Thirsty For Income? How To Thrive In This Yield Desert
Apple's First Annual Sales Decline In 15 Years
Opinion Blog
A Hard Brexit And Reduced Migration Won't Benefit UK Workers
What Triggers Collapse?
Precious Metals Blog
Inflation Surging As Platinum Signals Stock Market Decline
Live Markets
26Oct2016 Market Close: US Markets Close Lower, Boeing Shares Up, Texas Tea Stabilizes In Low 49's, Gold Falls To 1266, Friday's Fed Rate Change Promises To Be A Game Changer
Amazon Books & More

.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Middle East / Africa
USA Government

Crowdfunding ....



Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day


Asia / Pacific
Middle East / Africa
USA Government

RSS Feeds / Social Media

Combined Econintersect Feed

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution



  Top Economics Site Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved