Family Characteristics; Housing; Multidisciplinary
Abstract :
[en] We investigate the problem of interest rate risk transforming into default risk of adjustable-rate mortgage loans in the EU. Bank regulation is strikingly not neutral in this aspect, it explicitly favors short-duration adjustable-rate loans over long-duration fixed-rate loans in the framework of the gap management. This asymmetry in the regulation creates perverse incentives both for banks and households, which can lead to aggressive risk-taking, over-indebtedness of unhedged households, high procyclicality of mortgage markets, and increased systemic risks. We present a stress test model to quantify potential losses stemming from this specific risk from the perspective of lender institutions. We estimate the average extra capital that is needed to cover the additional risk of adjustable-rate mortgage loans in the EU to be 0.53% of the value of the total mortgage portfolio and 1.97% of the value of the adjustable-rate mortgage portfolio. We propose introducing a stress test model as a new mandatory element into banks' risk management framework.
Disciplines :
Finance
Author, co-author :
Banai, Ádám; Executive Directorate for Monetary Policy Instruments and Foreign Reserve Management, National Bank of Hungary, Budapest, Hungary ; MNB Institute, John von Neumann University, Kecskemét, Hungary
BERLINGER, Edina ; University of Luxembourg ; Department of Finance, Corvinus University of Budapest, Budapest, Hungary
Dömötör, Barbara; Department of Finance, Corvinus University of Budapest, Budapest, Hungary
External co-authors :
yes
Language :
English
Title :
Adjustable-rate mortgages in the era of global reflation: How to model additional default risk?
National Office for Research, Development, and Innovation National Office for Research, Development, and Innovation National Research, Development and Innovation Office - NKFIH National Research, Development and Innovation Office - NKFIH
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