Insights from an International Perspective

Majdi Debbich
Majdi Debbich

CFS Fellow Majdi Debbich, an Economist at the French Financial Markets Authority (AMF) in Paris, was an invited speaker at the The Superintendency of Banks and Financial Institutions (SBIF) conference in Chile. Held in November, 2015, the conference brought together academic researchers, policy makers and practitioners to share ideas and insights on financial stability, regulation practices and investor protection.

In the summary below, Debbich shares some insights he gained from his experience in the essay below.As a Center for Financial Security fellow and economist at the French securities markets regulator, I was invited to present a paper on the interactions between financial literacy levels and the demand for professional financial advice. The paper I presented aims at explaining why investors with low financial capabilities tend to ask less often for advice than their financially literate counterpart.

Using a simple theoretical model and an empirical assessment on French data, I show that product-biased compensation schemes tend to alter the relevance of the information provided by financial advisors, in particular when facing investors with low financial sophistication. Given this pattern, investors who are the most in need of financial guidance tend not to ask for advice because they know they will not get any relevant information. My paper was well-received and I appreciated the discussion with the audience. In particular, I was given tips for improving the theoretical part of the paper and strengthen my arguments.

The conference was also a great opportunity to meet other researchers and learn from their results. In particular, three economists from the central bank of Chile presented a very interesting paper on mortgage default[1]. The paper features a theoretical model and an empirical application to the case of Chile. The authors assess the determinants of mortgage default and disentangle idiosyncratic factors from systemic ones. The results they presented provide evidence that households’ composition and income are important determinants of the probability of default. The higher the number of persons in the household, the higher the probability of default is. Regarding income, it tends to be negatively associated to foreclosure. Interestingly, the authors find that the level of education of the household’s head plays a part even when controlling for series of other determinants. The negative influence of education on the probability of mortgage default could stem from some financial literacy effect. Indeed, it has already been widely documented in the literature that financially sophisticated households tend to manage better their delinquency episodes and better succeed in avoiding default and foreclosure.

The paper also shows that experiencing a negative shock in the recent past or having renegotiated the mortgage is positively and significantly associated to the probability of default. Additionally, the study provides evidence that variables the authors describe as systemic are also important. In particular, the coefficient of an interaction term between income and the loan-to-value ratio is positive and highly significant. This suggests that the higher the income of a borrower, the higher is the positive impact of the loan-to-value ratio on the probability to make default. Eventually, this paper provides a comprehensive assessment of mortgage default risk in the case of Chile and has strong policy implications for helping distressed households faced with mortgage delinquency.

Another paper I found very interesting deals with consumer debt risk and income volatility[2]. As in the previous paper, the author proposes a theoretical model and an empirical analysis covering the last 20 years for Chile. The model simulates the behavior of heterogeneous households suffering labor income and debt financing shocks. Households are able to contract credits to finance current consumption but credits can be denied by creditors depending on households’ current debt levels and financial risks. The model successfully replicates stylized facts for Chilean debt default rates. The author highlights the strong impact of unemployment rates increase on loans delinquency and shows that credit constraints can have a persistent cost in terms of overall consumption for households. An increase of unemployment rates of 3 % is found to increase insolvent households by 3 to 4 times the normal rate while the decline in total expenditure slightly increases due to credit constraints. From a policy perspective, this paper is enlightening because it provides evidence of the channel through which macroeconomic conditions can influence microeconomic behaviors and outcomes.


[1] Avanzini D., J.F. Matinez and V. Pérez, “A micro-powered model of mortgage default risk: the case of Chile”

[2] Madeira, Carlos, “Explaining consumer debt risk through a micro model of income volatility and credit markets”

 The full program of the conference as well as some of the presentations can be found here.