The Korean Economic Forum
A Stress Test on the Household Sector of the Contractionary Monetary Policy Shock
Yeongwoong Do (Seoul National University)Year 2023Vol. 16No. 1
AbstractThis paper assesses how raising monetary policy rates could affect the vulnerability of the financial institutions exposure to the household sector using the Survey of Household Finances and Living Conditions data in Korea. To measure the financial vulnerability, I calculate the probability of default (PD), exposure at default (EAD), and loss given default (LGD) from the micropanel data. The main result of the stress test indicates that the aggregate risk deriving by interest rate hikes is still within manageable levels for financial institutions since the delinquency rate and the expected loss less than the historical peaks. However, the stress test results also show that the non-bank sectors are more vulnerable than the bank sector and that increasing policy rate non-linearly exacerbates the household financial fragility.