Project TUI: A structural approach to the understanding and measurement of residential mortgage lending risk

Release date
March 2008
Ian Harrison; Chris Mathew
TUI is a structural model of the residential housing loan default process. It is designed to investigate major loan loss events, and to calculate economic capital for housing loan portfolios, in jurisdictions where empirical evidence of tail event losses is slight or non-existent. It works by first describing the key risk characteristics of a small set of macroeconomic variables which are relevant to the housing loan default process. Macroeconomic scenarios are drawn from a joint distribution of these variables and bank and borrower behavioural modules are used to generate a loan loss rate for each scenario. A large set of loss outcomes generates a loan loss distribution which is used to calculate, amongst other things, capital requirements, average default rates and stressed loss given default rates by risk bucket and for overall portfolios. The model has been used by the Reserve Bank to assess the applicability of the Basel II IRB housing capital model to New Zealand conditions and to provide a benchmark for assessing New Zealand IRB banks’ housing capital models.