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Stress testing the German mortgage market

Author

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  • Barasinska, Nataliya
  • Haenle, Philipp
  • Koban, Anne
  • Schmidt, Alexander

Abstract

This paper presents a framework for estimating losses in the residential real estate mortgage portfolios of German banks. We develop an EL model where LGD estimates are based on current collateral values and PD dynamics are estimated using a structural PVAR approach. We confirm empirically that foreclosure rates are rising with the unemployment rate and are inversely related to house price inflation. Being consistent with our expectation that strategic defaults do not play a central role given the full personal liability of German households, the results give broad support for the double-trigger hypothesis of mortgage defaults. In order to analyse the possible credit losses stemming from residential mortgage lending we then use the model to run a top-down stress test and simulate losses on the individual bank level for the years from 2018 to 2020 for the whole German banking sector. Our results show that loss rates in the residential mortgage portfolios of German banks do increase significantly in an adverse economic environment. The estimated expected losses are widely distributed in the banking system leading, on average, to a 0.4 percentage points reduction in the CET1 ratio over the simulation period.

Suggested Citation

  • Barasinska, Nataliya & Haenle, Philipp & Koban, Anne & Schmidt, Alexander, 2019. "Stress testing the German mortgage market," Discussion Papers 17/2019, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdps:172019
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    Cited by:

    1. Pelzer, Manuel & Barasinska, Nataliya & Buchholz, Manuel & Friedrich, Sören & Geiger, Sebastian & Hristov, Nikolay & Jamaldeen, Philip & Löffler, Axel & Madjarac, Marcel & Roth, Markus & Silbermann, L, 2021. "Deleveraging-Potenzial im deutschen Bankensystem und Auswirkungen auf die Finanzstabilität [Potential deleveraging in the German banking system and effects on financial stability]," Technical Papers 12/2021, Deutsche Bundesbank.
    2. Budnik, Katarzyna & Ponte Marques, Aurea & Giglio, Carla & Grassi, Alberto & Durrani, Agha & Figueres, Juan Manuel & Konietschke, Paul & Le Grand, Catherine & Metzler, Julian & Población García, Franc, 2024. "Advancements in stress-testing methodologies for financial stability applications," Occasional Paper Series 348, European Central Bank.
    3. Ter Steege, Lucas & Vogel, Edgar, 2021. "German residential real estate valuation under NGFS climate scenarios," Technical Papers 09/2021, Deutsche Bundesbank.
    4. Fuad Ganbarov & Klaudia Smoląg & Rashad Muradov & Konul Aghayeva & Rumella Jafarova & Yashar Mammadov, 2020. "Sustainable Development of the Mortgage Market in Azerbaijan: Commercial Risks of Housing Construction, Social Vision, and State Influence," Sustainability, MDPI, vol. 12(12), pages 1-18, June.
    5. Barasinska, Nataliya & Ludwig, Johannes & Vogel, Edgar, 2021. "The impact of borrower-based instruments on household vulnerability in Germany," Discussion Papers 20/2021, Deutsche Bundesbank.

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    More about this item

    Keywords

    residential real estate; mortgages; credit risk; stress testing; German banks;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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