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Stress testing household balance sheets in Luxembourg

Gastón Giordana () and Michael Ziegelmeyer ()

The Quarterly Review of Economics and Finance, 2020, vol. 76, issue C, 115-138

Abstract: This paper uses individual household data from Luxembourg to evaluate how severe economic conditions could affect bank exposure to the household sector. Using data from a representative survey, information on household income, expenses and liquid assets are used to calculate household-specific probabilities of default (PD), aggregate bank exposure at default (EAD) and aggregate bank loss given default (LGD). The exercise is repeated with scenarios combining severe but plausible shocks to real estate prices, bonds and stocks, household income and interest rates. Compared to the baseline scenario, the LGD rises by a multiple of eight, reaching 4.2% of total bank exposure to the household sector. The high-stress scenario also generates a relatively high percentage of defaults among socio-economically disadvantaged households (i.e. low net wealth, low income, low education, three or more dependent children). Our main conclusion is that bank losses appear to be quite sensitive to financial stress, despite three mitigating factors in Luxembourg: indebted households tend to hold liquid assets that can help smooth shocks, household leverage tends to decline rapidly once mortgages have been serviced several years, and loan-to-value ratios at origination appear not to be excessive.

Keywords: Stress testing; Financial stability; HFCS; Household finance (search for similar items in EconPapers)
JEL-codes: D10 D14 E44 G01 G21 (search for similar items in EconPapers)
Date: 2020
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Working Paper: Stress testing household balance sheets in Luxembourg (2019) Downloads
Working Paper: Stress testing household balance sheets in Luxembourg (2018) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:76:y:2020:i:c:p:115-138

DOI: 10.1016/j.qref.2019.04.003

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