Are large credit exposures a source of concentration risk?

Jan Nokkala ()
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Jan Nokkala: University of Eastern Finland, Department of Finance and Accounting

Bank i Kredyt, 2022, vol. 53, issue 4, 375-398

Abstract: Credit concentration risk may be the largest risk for a bank. The division into non-granular and granular portfolios based on portfolio size and individual credit sizes is essential for assessing the concentration risk of a portfolio. This paper identifies portfolio-specific large credits as a source of concentration and evaluates the effects of these to portfolios risks. Choices on risk measures and assumptions on portfolio structure are aligned with those on previous studies, which enables previous research to be complemented with results on large credits. The use of parameters and portfolio sizes from actual portfolios increases the applicability of the results. The results show that accumulating large equally- -sized credits has both increasing and decreasing implications to concentration risk following initial portfolio structure. In the smallest portfolios the share of granularity exceeds 80% of credit risk. A novel risk-weight add-on formulation with a unified interpretation for banks using standardized methods or internal ratings-based method is also introduced.

Keywords: risk measurement; concentration risk; credit risk; Basel regulation (search for similar items in EconPapers)
JEL-codes: G10 G20 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:nbp:nbpbik:v:53:y:2022:i:4:p:375-398

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