Granular credit risk
- Sigurd Galaasen, Rustam Jamilov, Ragnar Juelsrud and Hélène Rey
- Working Paper
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)