Granular Credit Risk

Helene Rey, Sigurd Galaasen, Rustam Jamilov and Ragnar Juelsrud

No 15385, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Granularity; Aggregation; Systemic risk; Financial intermediaries (search for similar items in EconPapers)
JEL-codes: G20 (search for similar items in EconPapers)
Date: 2020-10
New Economics Papers: this item is included in nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Related works:
Working Paper: Granular credit risk (2020)
Working Paper: Granular Credit Risk (2020)
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