Understanding Household Vulnerabilities in Portugal

Recent high inflation and rising interest rates can be expected to increase the risk of household financial vulnerabilities, tightening financial capacity and raising credit risk. We develop a household stress-testing framework using microdata to identify pockets of vulnerability and associated bank exposures in Portugal under potential macro-financial shocks by computing household-level vulnerability indicators as well as bank-level indicators to measure the corresponding exposure and potential losses. Particular attention is given to structural features of the Portuguese economy, especially in scenario design and shock specification. The aggregate impact on vulnerability measures remains contained under most individual shocks and the adverse scenario. The income shock has stronger effects on most indicators, whereas the real estate shock notably increases banks’ expected losses from vulnerable households. Households in the lowest income quintiles exhibit a bigger increase in vulnerability, both in the adverse scenario and under specific shocks.