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Capital for concentrated credit portfolios
Journal of Risk Management in Financial Institutions,
8
(4),
314-322
(2015)
Abstract
Most credit portfolios contain obligor concentration risk and yet international bank regulatory capital rules and many industry models assume perfect diversification. Multiple methods are available to calculate the approximate capital needs of a concentrated credit portfolio, but many of these involve advanced mathematical arguments and substantial computation time, and fail to clearly identify the most important credits causing concentration risk. In this paper, the author illustrates three approaches for calculating loss distributions and value-at-risk capital requirements. The large exposure approach is especially easy to implement, produces accurate estimates of the economic capital required for a concentrated portfolio and immediately identifies the obligors most responsible for generating concentration risk.
Keywords: portfolio diversification; idiosyncratic default risk; obligor concentration; Vasicek single common factor model of credit risk; credit value at risk; Basel bank capital requirements
The full article is available to subscribers to the journal.
Author's Biography
Paul Kupiec is resident scholar at the American Enterprise Institute. He studies the management and regulation of financial markets and institutions including developments in bank risk measurement and systemic risk modelling, the design of regulatory policy and the impact of post financial crisis regulatory reforms. He is a frequent contributor to many academic journals and business publications as an author, editor and peer reviewer, and has testified on multiple occasions before the US Senate and House of Representatives on banking and financial regulatory issues.
Citation
Kupiec, Paul (2015, October 1). Capital for concentrated credit portfolios. In the Journal of Risk Management in Financial Institutions, Volume 8, Issue 4. https://doi.org/10.69554/JWSY9152.
© Henry Stewart
Publications LLP
Publications LLP