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The paper aims to investigate the impact of financial liabilities on households’ holdings of financial assets. The debt-to-income ratio of the household sector increased from 75 per cent in 2000 to 99 per cent in 2010 in the euro area on average, and the rapid accumulation of household debt has induced the need to study how indebtedness affects the behaviour of households beyond their borrowing decisions.

The paper uses the first wave of the Household Finance and Consumption Survey from 2009-2010 covering euro area countries. The paper estimates a system of equations for households’ financial liabilities and assets, taking account of endogeneity and selection bias.

The results indicate that higher household liabilities are related to lower holdings of financial assets. The results are confirmed by a large number of robustness tests. The findings support the hypothesis that credit availability reduces precautionary savings as income shocks can be smoothed by borrowing, meaning fewer assets are held for self-insurance against consumption risk.

The results are obtained from a recession period when households faced aggregate shocks, whereas credit constraints were tighter than during good times. The implications of lower incentives to keep financial assets by indebted households is that they are actually more vulnerable to aggregate shocks, as they have fewer resources available when they are hit by a negative shock.

This is the first paper to investigate the effect of liabilities on financial assets using household level data. The paper takes a holistic view and models financial assets and liabilities jointly while controlling for endogeneity and selection bias.

This paper aims to investigate the mutual dependence between housing prices and housing credit in Estonia, a country that experienced rapid debt accumulation during the 2000s and big swings in house prices during that period.

The authors use Bayesian econometric methods on data spanning 2000–2015.

The estimations show the interdependence between house prices and housing credit. More importantly, negative housing credit innovations had a stronger effect on house prices than positive ones.

The asymmetry in the linkage between housing credit and house prices highlights important policy implications, in that if central banks increase capital buffers during good times, they can release credit conditions during hard times to alleviate the negative spillover into house prices and the real economy.