A stress testing framework for the Maltese household sector

This paper outlines a stress testing framework for the household sector in Malta based on micro data. The analysis depends on granular data relating to income, expenses, and the value of liquid assets from the third wave of the Household Finance and Consumption Survey and assesses the financial resilience of households to macro-financial shocks. Households’ vulnerability is evaluated based on probabilities of default, while loan losses to banks are quantified by means of the exposure at default and loss given default. The analysis examines the impact of four adverse shocks separately: a rise in interest rates, an increase in the unemployment rate, a fall in real estate prices, and a fall in the value of liquid assets. The results indicate that: (i) households are most vulnerable to potential interest rate shocks, (ii) Maltese households have an ample amount of liquid assets that can cover their losses, and (iii) potential loans losses to banks stemming from the household sector are limited. Lastly, to simulate unfavourable economic conditions, the individual shocks are assessed simultaneously by producing two combined stress test scenarios. It is found that the combined high-scale scenario results in a higher impact on the financial vulnerability metrics, but the effects are contained.