Abstract

Credit losses are the primary driver of large fluctuations in bank earnings and capital,
often spiking sharply during periods of economic stress. In this Memo, we analyse the
link between macroeconomic conditions and aggregate credit losses for large Norwegian banks, explicitly addressing model uncertainty within a VAR framework. We focus on tail-risk dynamics and find that the short-term upside risk of credit losses relative to total assets is largely driven by inflation and policy rate shocks. These shocks presumably increase borrowing costs and weaken economic activity, intensifying financial strain on households and firms. By capturing nonlinear effects and accounting for model uncertainty, our findings provide valuable insights for stress test calibration and macroprudential policy design.