The Regulation of Household Debt Levels in the EU and Three of its Member States: Evaluating the Legal Preconditions for Effectiveness

High levels of household debt were at the heart of the financial crisis. They have created vulnerabilities for individual households and for the financial system as a whole. In response to the crisis, the European Union reformed the Capital Requirements Regulation and Directive, and added new possibilities to increase risk-weights for household loans. It also adopted the Mortgage Credit Directive, which obliges lenders to assess a consumer’s creditworthiness before providing credit. Many member states created new macroprudential instruments, such as loan-to-value (LTV), debt-service-to-income (DSTI) and loan-to-income (LTI) limits, in order to restrict lending. But are these instruments designed effectively? Are the actors involved in applying and enforcing them independent enough to withstand pressure to loosen restrictions? To what extent and how should the EU be involved in addressing household indebtedness?

With these kinds of issues in mind, this interdisciplinary study answers the question to what extent instruments at both EU and national level are able to effectively influence household debt levels. To this end, this study starts with examining the determinants of high household debt levels. Subsequently, it analyses to what extent instruments at European and national level – in the Netherlands, Ireland and Germany – fulfil the preconditions for effectiveness. Based on the literature, three preconditions are identified. It is required for each instrument that:
1. Its rules are determinate and complete;
2. Its rules are enforceable with proportionate and dissuasive sanctions;
3. Its rules can and are likely to be applied, enforced and amended independently.

This study focusses on a range of instruments which have been created or reformed recently: capital-based tools, LTV, LTI and DSTI limits, rules on mandatory creditworthiness assessment and rules on the fiscal treatment of debt. In addition, this study considers the interaction between these instruments, by examining whether their relationship is non-conflicting and, whenever necessary for achieving the aim of influencing household indebtedness, complementary or substitutive. In this regard, among other things, it is analysed how principle-based and rule-based instruments in consumer law and macroprudential regulation can complement each other in preventing high household debt levels. The last chapter concludes how mechanisms and procedures for applying and enforcing instruments can be improved to ensure that the inaction bias will be reduced and supervisors will remain accountable. Based on the subsidiarity principle, it also elucidates which role EU actors – for instance the ESRB and EU institutions – should have to contribute to an effective framework for influencing household debt levels.