If a severe financial shock had hit the Australian economy during the 2000s the proportion of households likely to default on their loans would have increased by only two percentage points, according to the Reserve Bank.The latest issue of the Reserve Bank Bulletin provides details of a new household stress test the RBA has introduced to complement the Australian Prudential Regulation Authority's regular stress testing of banks.The RBA's overall conclusion from the test is that households were "quite resilient" during the 2000s and were well placed to withstand a shock to economic conditions.The Reserve Bank has not conducted stress tests of the Australian financial system previously, leaving that job to APRA instead.However, in 2012, the International Monetary Fund recommended that the central bank develop its own stress-testing framework, as part of its financial stability mandate.To complement APRA's program of stress testing banks, the RBA focused on household loan portfolios. Household loans account for around two-thirds of banks' lending.The bank has developed a simulation-based model that relies on household data from Melbourne University's data series, Household Income and Labour Dynamics in Australia. A pre-stress baseline was established for each household: a financial margin was calculated as disposable income less rental payments, estimated minimum consumption expenditure and estimated minimum debt-servicing costs.The model assigns a probability of default, and, when combined with household assets, a loss-given-default rate. The model also calculates a debt-at-risk rate, which is a measure of expected household loan losses. Once these pre-stress measures were determined, shocks were applied. These included changes to interest rates, the unemployment rate and asset prices.The RBA applied the model to HILDA data from 2002, 2006 and 2010. It found that the proportion of households with negative financial margins (that is, likely to default) declined from around 12 per cent in 2002 to 8.5 per cent in 2010.Interest rates were similar in each period, while real household income grew strongly over the period, which eased the burden of living expenses and debt repayment.It also found that most of the households with negative financial margins did not actually default. They had other assets they could draw on to get out of strife.Banks' exposure to households with negative financial margins "appears to have been limited", with the aggregate debt at risk as a share of household debt generally staying below 1.5 per cent throughout the 2000s.When the RBA applied its shocks it found that a one percentage point increase in interest rates caused the proportion of households with negative financial margins to rise by 0.6 percentage points.A one percentage point increase in the unemployment rate caused the proportion of households with negative financial margins to rise by 0.3 percentage points.And a 10 per cent fall in asset prices did not affect household financial margins.Applying simultaneous shocks, where all assets prices fell 25 per cent, unemployment rose by six percentage points and there was no reduction in interest rates, the proportion of households expected to default rose by two percentage points above the pre-stress levels.