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Updated: Sep 29, 2025

An R-Based Landscape Validation of a Competing Risk Model
Published on: September 16, 2022
Adjustable-rate mortgages in the era of global reflation: How to model additional default risk?
Ádám Banai1,2, Edina Berlinger3, Barbara Dömötör3
1Executive Directorate for Monetary Policy Instruments and Foreign Reserve Management, National Bank of Hungary, Budapest, Hungary.
Abstract:
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.
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