Understanding the Effect of Concentration Risk in the Banks’ Credit Portfolio: Indian Cases

Arindam Bandyopadhyay ()

MPRA Paper from University Library of Munich, Germany

Abstract: Credit Concentration Risk has been the specific cause of many occurrences of financial distress of banks world wide. This paper analyzes the credit portfolio composition of a large and medium sized leading public sector Bank in India to understand the nature and dimensions of credit concentration risk and measure its impact on bank capital from different angles. In evaluating the bank wide measures in managing concentration risk, we demonstrate how economic capital approach may enable the bank to assess the impact of regional, industry and individual concentration. We also show how portfolio selection can be done through correlation, stress tests, marginal risk contribution vis-à-vis risk adjusted return that will enable the top management to manage portfolio concentration risk and accordingly plan its capital.

Keywords: Credit Concentration; Portfolio Risk; Bank’s Economic Capital (search for similar items in EconPapers)
JEL-codes: G18 G21 G32 (search for similar items in EconPapers)
Date: 2010-07
New Economics Papers: this item is included in nep-ban and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:24822

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