Title: Stress-testing Australian Mortgagors

Authors
Benjamin Beckers - Reserve Bank of Australia
Amelia Gao - Reserve Bank of Australia

Abstract:

How resilient indebted households are to adverse macroeconomic shocks has implications for financial stability risks in Australia, given household loans account for around two-thirds of Australian banks’ lending. In this paper, we develop a novel household-level stress-testing model that is now used regularly to support the Reserve Bank’s assessment of financial stability risks arising from mortgage debt in Australia. The model uses rich loan-level data from the Securitisation System which allows to stress-test around one third of all Australian borrowers’ ability to service their debts under different macroeconomic scenarios. Extending earlier Australian household stress-testing models, a key feature of our model is that we explicitly account for the liquid savings buffers that most Australian mortgagors hold in offset and redraw accounts. We illustrate how the model is used by Reserve Bank staff to support the assessment of banks’ credit risks by running three hypothetical macroeconomic scenarios. We demonstrate that accounting for borrowers’ savings buffers from mortgage prepayments can almost halve the estimated expected credit losses faced by lenders in a severe macroeconomic shock. Our model can also shed a light on the distribution of budget pressures faced by different mortgagor households as a result of financial or economic shocks.

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