Norges Bank

Working Paper

Granular credit risk

Author:
Sigurd Galaasen, Rustam Jamilov, Ragnar Juelsrud and Hélène Rey
Series:
Working Paper
Number:
15/2020

Abstract

What is the impact of granular credit risk on banks and on the economy? We provide the first causal identification of single-name counterparty exposure risk in bank portfolios by applying a new empirical approach on an administrative matched bank-firm dataset from Norway. Exploiting the fat tail properties of the loan share distribution we use a Gabaix and Koijen (2020a,b) granular instrumental variable strategy to show that idiosyncratic borrower risk survives aggregation in banks portfolios. We also find that this granular credit risk spills over from affected banks to firms, decreases investment, and increases the probability of default of non-granular borrowers, thereby sizably affecting the macroeconomy.

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ISSN 1502-8190 (online)

Published 21 October 2020 11:00
Published 21 October 2020 11:00