Sensitivity of Czech Households to Interest Rate and Income Shock. Applications on Microdata

Abstract

We present a set of practical applications of the household sector stress testing approach used at the Czech National Bank. The aim is to test households’ ability to repay their loans in the event of extremely adverse economic developments. Besides this, the household sector stress test methodology has so far been used for two other purposes: (i) to construct a simple reverse stress test and explore the sensitivity of Czech households to a rise in loan interest rates and a decline in income, and (ii) to provide some supportive evidence for the calibration of debt service-to-income limits.