Mind the Build-up: Quantifying Tail Risks for Credit Growth in Portugal

We quantify the effect of cyclical systemic risk and economic sentiment on non-financial corporations and households’ (total) credit growth for Portugal between 1991Q1 and 2020Q2, following the Growth-at-risk methodology. We focus on the right-hand tail of the future credit growth distribution, as credit booms are potentially detrimental to financial stability. A set of measures of the upside tail risk in credit growth is computed to provide policymakers with more information to anticipate credit build-ups. We find that financial vulnerabilities and industrial sector economic confidence increase the upper tail risk of credit growth realizations for non-financial corporations in the short term (4 quarters horizon). At the medium to long term (12 quarters horizon), the impact of those indicators almost cancels each other out. As regards households, increasing financial vulnerabilities and consumers’ economic confidence display opposite effects on the upper tail risk of credit growth, at short and medium to long terms. Credit-at-risk anticipates credit build-ups preceding financial crises and decelerations corresponding to recessions. The upper tail to median and the upper to lower tail distances identify the upper tail dynamics as the main responsible for future credit growth uncertainty. Expected longrise reinforces Credit-at-risk results while the probabilities of observing future credit growth above its mean and credit growth one standard deviation above its current value exhibit high levels before 2008 for both non-financial corporations and households, followed by deep falls during recessions which signal credit busts. For all the measures, the 2013-2018 increase in tail risk depends on the structural change in credit growth dynamics observed in the early 2000s. The most recent results highlight the predominant role of confidence indicators, further dampened in 2020 by the COVID-19 effects on the economic outlook.