Bank lending rates and the riskiness of euro area household loans

Abstract

I assess the impact of the recent hike in bank lending rates on euro area retail borrowers using a novel microsimulation framework that updates household-level data of a recent representative survey with up-to-date macro-financial information. The key novelty is that existing mortgages are gradually repaid, and new ones are extended, a feature necessary for medium-term simulations in a period of sizable credit growth. Since lending rates have increased, debt servicing has become more demanding, and the simulated share of distressed loans has increased. Effects are stronger for adjusted rate mortgages, and especially for the most recent among them, but are present in all portfolios.

Keywords: household finance, microsimulations, financial stability, monetary policy