Stress testing, at its most general level, is an investigation of the performance of an entity under abnormal operating conditions.
Staff working papers
Lines of Credit and Consumption Smoothing: The Choice between Credit Cards and Home Equity Lines of CreditThe author models the choice between credit cards and home equity lines of credit (HELOCs) within a framework where consumers hold lines of credit as instruments of consumption smoothing across state and time.
The difference between actual borrowings and borrowing limits alone generates information asymmetry in the credit card market.
Bank of Canada Review articles
June 17, 2008 In this article, the authors build on the framework used in the Bank of Canada's Financial System Review to assess the evolution of household indebtedness and financial vulnerabilities in response to changing economic conditions. To achieve this, they first compare two microdata sets generated by Ipsos Reid's Canadian Financial Monitor and Statistics Canada's Survey of Financial Security. They find that the surveys are broadly comparable, despite methodological differences. This enables them to use the combined information content for the identification of the threshold value of the debt-service ratio (DSR). The article then presents an innovative framework that uses household-level microdata to simulate changes in the distribution of the DSR under various stress scenarios. The authors show how this framework can be used by analyzing the effects of two different scenarios on the distribution of the debt-service ratio and the impact on vulnerable households. This tool will enable researchers to refine their analyses of current risks to the financial health of Canadian households. The article concludes with comments on future directions for refining the Bank's analyses of household sector risk.