The risk of large losses in credit portfolios

Are lenders in the Portuguese financial system more likely to have large losses now than in the past? If a lender has large losses, is it more likely that another one will as well? How has that likelihood changed over time? We address these and other questions using granular credit exposure data in the period between 2009 and 2023. Our findings indicate that the risk of large losses is lower in 2023 than in 2012. Behind this result is a reduction in the borrowers’ default probabilities, a decline in the share of credit to firms accompanied by a rise in the share of credit to households and, to a more limited extent, an increase in loan recoveries. Additionally, we find that the risk of multiple lenders experiencing large losses simultaneously has decreased during the period of analysis. But, if one lender has large losses, the risk that another one will also face large losses has been rising since 2019. This result is driven by an increase in credit to sectors that have high default risk correlation.