Models with default options are hard to solve. We propose an extension of the endogenous grid method that solves default risk models more efficiently and accurately.
During the COVID-19 pandemic, Canada’s financial institutions have allowed households to defer payments on a range of loans. We present updated details of debt payment deferrals by borrowers through to December 2020.
When lenders cannot directly identify behavioural and rational borrowers, they use type scoring to track the likelihood of a borrower’s type. This leads to the partial pooling of borrowers, which results in rational borrowers subsidizing borrowing costs for behavioural borrowers. This, in turn, reduces the effectiveness of regulatory policies that target mistakes by behavioural borrowers.
Since the start of the COVID-19 pandemic, Canada’s financial institutions have allowed borrowers to defer payments on a range of loans. In a series of charts, we investigate what payment deferrals tell us about the financial health of borrowers and the related risks to financial stability.
COVID-19 presents challenges for indebted households. We assess these by drawing parallels between pandemics and natural disasters. Taking into account the financial health of the household sector when the pandemic began, we run model simulations to illustrate how payment deferrals and the labour market recovery will affect mortgage defaults.
Remarks (delivered virtually)Timothy LaneCFA Society Winnipeg and Manitoba Association for Business EconomicsWinnipeg, Manitoba
Deputy Governor Timothy Lane explains how the Bank is helping Canadian households and businesses weather the COVID-19 crisis, and how our actions today are laying a solid foundation for our future economic recovery.
We study the causal effect of mortgage rate changes on consumer spending, debt repayment and defaults during an expansionary and a contractionary monetary policy episode in Canada. We find asymmetric responses of consumer durable spending, deleveraging and defaults. These findings help us to understand household sector response to interest rate changes.