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Adjustable-rate mortgages in the era of global reflation – Publication by Edina Berlinger and Barbara Dömötör 

2022-07-14 09:37:57

The article co-authored by Edina Berlinger and Barbara Dömötör was published in the Plos One.
Corvinus Épület

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. 

Related contacts

Dr. Berlinger Edina edina.berlinger@uni-corvinus.hu Rektori Szervezet / Pénzügy Intézet / Befektetések
Egyetemi Tanár / Professor
Fővám tér 13-15 (Sóház), 281
Phone: +36 1 482 5212 • Ext: 5212
Dömötör Barbara Mária barbara.domotor@uni-corvinus.hu Rektori Szervezet / Pénzügy Intézet / Befektetések
Egyetemi docens / Associate Professor
E épület, 281
Phone: +36 1 482 5212 • Ext: 5212
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GEN.:2024.06.25. - 14:48:39