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Stress Testing Household Debt

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Abstract

We estimate a county-level model of household delinquency and use it to conduct \"stress tests\" of household debt. Applying house price and unemployment rate shocks from Comprehensive Capital Analysis Review (CCAR) stress tests, we find that forecasted delinquency rates for the recent stock of debt are moderately lower than for the stock of debt before the 2007-09 financial crisis, given the same set of shocks. This decline in expected delinquency rates under stress reflects an improvement in debt-to-income ratios and an increase in the share of debt held by borrowers with relatively high credit scores. Under an alternative scenario where the size of house price shocks depends on housing valuations, we forecast a much lower delinquency rate than occurred during the crisis, reflecting more reasonable housing valuations than pre-crisis. Stress tests using other scenarios for the path of house prices and unemployment also support the conclusion that household debt curren tly poses a lower risk to financial stability than before the financial crisis.

Suggested Citation

  • Neil Bhutta & Jesse Bricker & Lisa J. Dettling & Jimmy Kelliher & Steven Laufer, 2019. "Stress Testing Household Debt," Finance and Economics Discussion Series 2019-008, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2019-08
    DOI: 10.17016/FEDS.2019.008
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    1. Robert Clark & Shaoteng Li, 2022. "The Strategic Response of Banks to Macroprudential Policies: Evidence from Mortgage Stress Tests in Canada [LIBOR manipulation?]," Review of Finance, European Finance Association, vol. 26(1), pages 187-216.

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    More about this item

    Keywords

    Delinquency; Household debt; Loan default; Stress testing;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G01 - Financial Economics - - General - - - Financial Crises
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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