  Realistic credit risk assessment, the estimation of losses from
counterparty's failure, is central for the financial stability. Credit risk
models focus on the financial conditions of borrowers and only marginally
consider other risks from the real economy, supply chains in particular. Recent
pandemics, geopolitical instabilities, and natural disasters demonstrated that
supply chain shocks do contribute to large financial losses. Based on a unique
nation-wide micro-dataset, containing practically all supply chain relations of
all Hungarian firms, together with their bank loans, we estimate how
firm-failures affect the supply chain network, leading to potentially
additional firm defaults and additional financial losses. Within a multi-layer
network framework we define a financial systemic risk index (FSRI) for every
firm, quantifying these expected financial losses caused by its own- and all
the secondary defaulting loans caused by supply chain network (SCN) shock
propagation. We find a small fraction of firms carrying substantial financial
systemic risk, affecting up to 16% of the banking system's overall equity.
These losses are predominantly caused by SCN contagion. For every bank we
calculate the expected loss (EL), value at risk (VaR) and expected shortfall
(ES), with and without accounting for SCN contagion. We find that SCN contagion
amplifies the EL, VaR, and ES by a factor of 4.3, 4.5, and 3.2, respectively.
These findings indicate that for a more complete picture of financial stability
and realistic credit risk assessment, SCN contagion needs to be considered.
This newly quantified contagion channel is of potential relevance for
regulators' future systemic risk assessments.
