Capital for concentrated credit portfolios

Paul Kupiec

Journal of Risk Management in Financial Institutions, 2015, vol. 8, issue 4, 314-322

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 (search for similar items in EconPapers)
JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2015
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Related works:
Working Paper: Capital for concentrated credit portfolios (2015)
Working Paper: Capital for concentrated credit portfolios (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:aza:rmfi00:y:2015:v:8:i:4:p:314-322

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