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US and Canada in Low-Stress Regime: Limited Amplification Effects

A recent analysis has revealed that when the United States and Canada are in low-stress regimes, the amplification effects of financial stress on macrofinancial variables within each block and from the US block to the Canadian block are very limited.

In contrast, when both countries are in high-stress regimes, significant amplification effects arise. This means that financial stress has a more negative impact on macrofinancial variables within each country, and the deterioration in these variables is exacerbated by the transmission of stress from one block to another.

Household Risk Assessment Model

To better understand the impact of risk scenarios on household loans in arrears, researchers have developed the Household Risk Assessment Model (HRAM). This model simulates the effects of risk scenarios on variables at the household level, such as income and debt.

HRAM incorporates a significant amount of household heterogeneity, accounting for differences in socio-demographic characteristics and time-varying financial characteristics. The model also accounts for various financial frictions faced by households, including those related to mortgages.

Non-Linear Dynamics

One of the key features of HRAM is its ability to capture non-linear dynamics at the household level. For example, the model takes into account the impact of unemployment on default outcomes, as well as the allocation of first-time homebuyers and the depletion of financial savings.

Illustrative Representation

[Figure 6: Household Risk Assessment Model]

This figure provides an illustrative representation of HRAM, showing how the model uses stressed macrofinancial variables from RAMM as input and projects the evolution of income, employment, and balance sheets at the household level. The figure highlights the importance of accounting for distributional effects in assessing the impact of risk scenarios on household default rates and bank credit losses.

Conclusion

In conclusion, while the amplification effects of financial stress are limited when the US and Canada are in low-stress regimes, significant amplification effects arise when both countries are in high-stress regimes. The Household Risk Assessment Model provides a valuable tool for understanding the impact of risk scenarios on household loans in arrears and accounting for distributional effects is crucial in assessing the vulnerability of households to negative shocks.