Working Paper: CEPR ID: DP15385
Authors: Sigurd Galaasen; Rustam Jamilov; Ragnar Juelsrud; Hélène Rey
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 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 sizeably affecting the macroeconomy.
Keywords: granularity; aggregation; systemic risk; financial intermediaries
JEL Codes: G20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| idiosyncratic borrower risk (G51) | loan-level returns (G12) |
| negative firm shock (E44) | loan-level returns (G12) |
| granular credit risk (G21) | investment (G31) |
| negative shocks to affected banks (F65) | default probabilities among non-granular borrowers (G21) |
| granular credit risk (G21) | macroeconomic outcomes (E66) |
| one standard deviation negative granular credit supply shock (E51) | bankruptcy likelihood for non-granular firms (G33) |