The Safe-Tail Paradox: Stress Testing AI Exposure of Banks Borrowers

Christophe Hurlin and Christophe Pérignon
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Christophe Hurlin: University of Orleans
Christophe Pérignon: HEC Paris - Finance Department

No 1630, HEC Research Papers Series from HEC Paris

Abstract: We document a Safe-Tail Paradox in banks’ credit portfolios: retail borrowers classified as safest by scoring models are also the most exposed to artificial intelligence (AI)-related labor income risk. The paradox arises because AI exposure is positively correlated with borrower characteristics historically associated with low default risk (e.g., stable employment, high income), while AI exposure can weaken repayment capacity through displacement and wage compression. Credit risk therefore becomes concentrated in the safest segments of mortgage portfolios, precisely where regulatory capital buffers are thinnest. We design a borrower-level AI stress test and apply it to a synthetic portfolio calibrated to the French residential mortgage market. As AI adoption intensifies, capital requirements rise sixfold more in the safest class than in the riskiest, highlighting the need for AI-aware risk management.

Keywords: generative artificial intelligence; stress testing; retail credit risk; mortgage lending (search for similar items in EconPapers)
JEL-codes: G21 G28 O33 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2026-04-28, Revised 2026-05-01
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Persistent link: https://EconPapers.repec.org/RePEc:ebg:heccah:1630

DOI: 10.2139/ssrn.6633858

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