Discussion Paper Details

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Title: Granular Credit Risk

Author(s): Sigurd Galaasen, Rustam Jamilov, Ragnar Enger Juelsrud and Hélène Rey

Publication Date: October 2020

Keyword(s): aggregation, financial intermediaries, granularity and systemic risk

Programme Area(s): Financial Economics and International Macroeconomics and Finance

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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Bibliographic Reference

Galaasen, S, Jamilov, R, Juelsrud, R and Rey, H. 2020. 'Granular Credit Risk '. London, Centre for Economic Policy Research.