On the Relevance and Appropriateness of Name Concentration Risk Adjustments for Portfolios of Multilateral Development Banks

Eva L\"utkebohmert, Julian Sester and Hongyi Shen

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Abstract: Sovereign loan portfolios of Multilateral Development Banks (MDBs) typically consist of only a small number of borrowers and hence are heavily exposed to single name concentration risk. Based on realistic MDB portfolios constructed from publicly available data, this paper quantifies the magnitude of the exposure to name concentration risk using exact Monte Carlo simulations. In comparing the exact adjustment for name concentration risk to its analytic approximation as currently applied by the major rating agency Standard & Poor's, we further investigate whether current capital adequacy frameworks for MDBs are overly conservative. Finally, we discuss the choice of appropriate model parameters and their impact on measures of name concentration risk.

Date: 2023-11, Revised 2024-03
New Economics Papers: this item is included in nep-ban and nep-rmg
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