Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/66940 
Year of Publication: 
2012
Series/Report no.: 
Bank of Canada Discussion Paper No. 2012-3
Publisher: 
Bank of Canada, Ottawa
Abstract: 
Rising levels of household indebtedness have created concerns about the vulnerabilities of households to adverse economic shocks and the impact on financial stability. To assess these risks, the author presents a formal stress-testing framework that uses microdata to simulate how various economic shocks affect the distribution of the debt-service ratio (DSR) for the household sector. Data from an Ipsos Reid Canadian Financial Monitor survey are used to construct the actual DSR distribution for households. Changes in the distribution are then simulated using a macro scenario describing the evolution of some aggregate variables, and micro behavioural relationships; for example, to simulate credit growth for individual households, cross-sectional data are used to estimate debt-growth equations as a function of household income, interest rates and housing prices. The simulated distributions provide information on vulnerabilities in the household sector.The author also describes a combined methodology where changes in the probability of default on household loans are used as a metric to evaluate the quantitative impact of negative employment shocks on the resilience of households and loan losses at financial institutions.
Subjects: 
Econometric and statistical methods
Financial stability
JEL: 
C15
C31
D14
E51
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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