Granular Credit Risk

88 Pages Posted: 3 Nov 2020 Last revised: 4 Feb 2022

See all articles by Sigurd Galaasen

Sigurd Galaasen

Norges Bank

Rustam Jamilov

London Business School

Ragnar Juelsrud

Norges Bank

Hélène Rey

London Business School; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: October 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.

Keywords: aggregation, financial intermediaries, granularity, systemic risk

JEL Classification: G20

Suggested Citation

Galaasen, Sigurd and Jamilov, Rustam and Juelsrud, Ragnar and Rey, Helene, Granular Credit Risk (October 2020). CEPR Discussion Paper No. DP15385, Available at SSRN: https://ssrn.com/abstract=3723577

Sigurd Galaasen (Contact Author)

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

Rustam Jamilov

London Business School ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

HOME PAGE: http://rustamjamilov.com

Ragnar Juelsrud

Norges Bank ( email )

Bankplassen 2
Oslo, 0151
Norway

HOME PAGE: http://ragnar.juelsrud.no

Helene Rey

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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