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The good, the bad and the impaired: A credit risk model of the Irish mortgage market

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  • Kelly, Robert
  • O’Malley, Terence

Abstract

Using a uniquely constructed loan-level dataset of the residential mortgage book of Irish financial institutions, this paper provides a framework for estimating default probabilities of individual mortgages. In contrast to the popular stock delinquency approach, this model provides estimates of default and cure flows: a requirement of the stress test approach adopted by the European Central Bank's comprehensive assessment. In addition, both default and cure transitions are modelled as functions of micro- and macro-covariates including loan characteristics and current macroeconomic conditions such as house prices and unemployment. When comparing the competing equity and affordability effects, labour market deterioration played a stronger role than house equity in the rise of Irish default rates. For cures, a scarring effect of default is identified and estimated with the probability of a loan returning to performing reducing by almost four per cent each month a loan remains delinquent.

Suggested Citation

  • Kelly, Robert & O’Malley, Terence, 2016. "The good, the bad and the impaired: A credit risk model of the Irish mortgage market," Journal of Financial Stability, Elsevier, vol. 22(C), pages 1-9.
  • Handle: RePEc:eee:finsta:v:22:y:2016:i:c:p:1-9
    DOI: 10.1016/j.jfs.2015.09.005
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    More about this item

    Keywords

    Mortgage default modelling; Irish banks; ECB comprehensive assessment;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • F30 - International Economics - - International Finance - - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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