Credit Portfolio Sector Concentration and Its Implications for Capital Requirements

Libor Holub, Michal Nyklicek and Pavel Sedlar

Chapter Thematic Article 3 in CNB Financial Stability Report 2014/2015, 2015, pp 131-138 from Czech National Bank, Research and Statistics Department

Abstract: This article assesses whether the sector concentration of the portfolio of loans to resident and non-resident legal entities according to information from the Central Credit Register (CCR) indicates a need for additional capital requirements under Pillar 2. A simplified version of the factor model is used for this purpose. The Herfindahl-Hirschman Index (HHI) is employed to indicate the degree of sector concentration and its long-term tendencies. The results of the factor model, which takes account of an institution's risk profile, signal a possible need for additional economic capital for portfolios featuring higher sector concentration and higher risk. In such cases, supervisors should evaluate whether sector concentration risk is correctly measured, assessed and incorporated into capital requirements in the bank's internal capital adequacy assessment process (ICAAP).

Date: 2015
ISBN: 978-80-87225-59-2
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Persistent link: https://EconPapers.repec.org/RePEc:cnb:ocpubc:fsr1415/3

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