States in the Cleveland Fed’s region have lower debt burdens than the nation as a whole, say Cleveland Fed researchers

Cleveland Fed provides, for the first time, state-level debt service ratios

The debt burdens of US households declined following the Great Recession and have now stabilized. While states within the Cleveland Fed’s District have followed that trend, they have lower debt burdens than the nation as a whole, say Federal Reserve Bank of Cleveland researchers Joel Elvery and Mark Schweitzer, largely because of lower mortgage and bank card debt.

The four states that are at least partially in the Cleveland Fed’s District are Ohio, Kentucky, Pennsylvania, and West Virginia. Because households in the region are devoting less of their income to covering debt payments than in the past, the researchers say they may be in a good position to increase consumption spending.

A simple measure of debt burden is the debt service ratio (DSR), the average share of disposable income that is devoted to required minimum payments on debt obligations such as auto loans and mortgages. When the DSR is high, the average family has high levels of debt payments relative to its income, a situation which may hinder the family’s ability to pay for other things.

The Federal Reserve Board of Governors publishes the DSR for the nation as a whole. Research underway at the Cleveland Fed is helping to increase understanding of household finance by estimating DSRs for individual states and by providing detail on what type of debt service—auto loan, bank card, home equity loan, mortgage, student loan, or other debt—is changing. The DSR estimates are created from the Federal Reserve Bank of New York’s Consumer Credit Panel (CCP).

Elvery and Schweitzer say the financial crisis of 2008 crystallized the importance of understanding household debt burden, as unsustainable debt levels led to a spike in mortgage defaults and threatened the stability of the financial sector.

Read How Stretched are Today’s Borrowers? Debt Service Levels in Fourth District States.

Federal Reserve Bank of Cleveland

The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.

The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.

Media contact

Doug Campbell, doug.campbell@clev.frb.org, 513.218.1892