The purpose of this paper is to stress test the resilience
of Croatian households with debt to economic shocks.
The shocks not only impact a household’s welfare, but
also increase the probability of loan default. As a result,
there is a direct link between these stress-testing exercises
and financial stability risks. The authors find that very
few households are at risk as a result of the shocks
experienced over the past few years; new vulnerable
households represent about 2 percent of all households,
6 percent of households with debt, and 2–3 percent
of aggregate banking system assets. This suggests that
household over-indebtedness in Croatia is unlikely to
become a drag on aggregate economic activity and thatfinancial stability risks remain manageable. One caveat
should be noted. Some 27–31 percent of households
with debt, representing 8–9 of banking system assets, are
vulnerable even before being subjected to an economic
shock. Since NPLs were low before the global financial
crisis, it can be argued that banks knew something
about some of these households that is not captured by
household budget surveys. It follows that the calculations
in this paper should primarily focus on the increased
vulnerability of households as a result of shocks and
are likely to represent an upper bound to the financial
stability risks faced by Croatia on account of household
indebtedness.