RDP 2015-01: Stress Testing the Australian Household Sector Using the HILDA Survey 1. Introduction

The Australian banking sector's lending to households accounts for a sizeable share of its total lending exposures and this share has increased over recent decades. Furthermore, recent international experience has emphasised the risks that the household sector can pose to financial stability and, consequently, to the broader macroeconomy. Therefore, it is prudent to continuously assess the household sector's financial resilience. Aggregate data – such as the household debt-to-income ratio – can only partially assist in this type of assessment; even if aggregate household indebtedness has increased, the household sector could still be highly resilient to macroeconomic shocks if debt is owed by households that are well placed to service it. Household surveys provide an insight into this, as they contain information on the distributions of household debt, assets and income.

In this paper, we use a simple stress-testing model based on data from the Household, Income and Labour Dynamics in Australia (HILDA) Survey. This allows us to: (1) quantify household financial resilience and exposure to shocks; (2) estimate the banking system's exposure to households that are more likely to default; and (3) assess how these measures have changed over the 2000s.

The remainder of this paper is set out as follows. Section 2 reviews the literature on stress testing and micro-simulation. Section 3 presents some descriptive statistics. Section 4 describes our stress-testing model, while Section 5 presents the results. Section 6 discusses some limitations of, and potential improvements to, the model. Finally, Section 7 concludes.