Stress Testing Household Balance Sheets in Luxembourg

52 Pages Posted: 27 Mar 2019

See all articles by Gastón Giordana

Gastón Giordana

Université Montpellier I

Michael Ziegelmeyer

Banque centrale du Luxembourg; Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Social Law and Social Policy

Date Written: March 26, 2019

Abstract

This paper uses representative individual household data from Luxembourg to evaluate how severe economic conditions could affect bank exposure to the household sector. 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 no-shock baseline, 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. 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: financial stability, HFCS, household finance

JEL Classification: D10, D14, E44, G01, G21

Suggested Citation

Giordana, Gastón and Ziegelmeyer, Michael Heinrich, Stress Testing Household Balance Sheets in Luxembourg (March 26, 2019). ECB Working Paper No. 2254 (2019); ISBN 978-92-899-3516-6 . Available at SSRN: https://ssrn.com/abstract=3360929

Gastón Giordana

Université Montpellier I ( email )

Avenue de la Mer Site Richter
163 Rue Auguste Broussonnet
34006 Montpellier Cedex 1, Cedex 2 34090
France

Michael Heinrich Ziegelmeyer (Contact Author)

Banque centrale du Luxembourg ( email )

2, boulevard Royal
Luxembourg, L-2983
Luxembourg

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Social Law and Social Policy ( email )

Amalienstraße 33
München, 80799
Germany

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