Assessing household credit risk: evidence from a household survey
AbstractThis paper investigates the main individual driving forces of Hungarian household credit risk and measures the shockabsorbing capacity of the banking system in relation to adverse macroeconomic events. The analysis relies on survey evidence gathered by the Magyar Nemzeti Bank (MNB) in January 2007. Our study presents three alternative ways of modelling household credit risk, namely the financial margin, the logit and the neural network approaches, and uses these methods for stress testing. Our results suggest that the main individual factors affecting household credit risk are disposable income, the income share of monthly debt servicing costs, the number of dependants and the employment status of the head of the household. The findings also indicate that the current state of indebtedness is unfavourable from a financial stability point of view, as a relatively high proportion of debt is concentrated in the group of risky households. However, risks are somewhat mitigated by the fact that a substantial part of risky debt is comprised of mortgage loans, which are able to provide considerable security for banks in the case of default. Finally, our findings reveal that the shock-absorbing capacity of the banking sector, as well as individual banks, is sufficient under the given loss rate (LGD) assumptions (i.e. the capital adequacy ratio would not fall below the current regulatory minimum of 8 per cent) even if the most extreme stress scenarios were to occur.
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Bibliographic InfoPaper provided by Magyar Nemzeti Bank (the central bank of Hungary) in its series MNB Occasional Papers with number 2008/70.
Length: 41 pages
Date of creation: 2008
Date of revision:
financing stability; financial margin; logit model; neural network; stress test.;
Find related papers by JEL classification:
- C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics
- D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
- E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-06-13 (All new papers)
- NEP-BAN-2008-06-13 (Banking)
- NEP-CMP-2008-06-13 (Computational Economics)
- NEP-EEC-2008-06-13 (European Economics)
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