Measuring Concentration Risk - A Partial Portfolio Approach

August 2, 2016

Preview Citation

Format: Chicago

Pierpaolo Grippa, and Lucyna Gornicka. Measuring Concentration Risk - A Partial Portfolio Approach, (USA: International Monetary Fund, 2016) accessed November 23, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Concentration risk is an important feature of many banking sectors, especially in emerging and small economies. Under the Basel Framework, Pillar 1 capital requirements for credit risk do not cover concentration risk, and those calculated under the Internal Ratings Based (IRB) approach explicitly exclude it. Banks are expected to compensate for this by autonomously estimating and setting aside appropriate capital buffers, which supervisors are required to assess and possibly challenge within the Pillar 2 process. Inadequate reflection of this risk can lead to insufficient capital levels even when the capital ratios seem high. We propose a flexible technique, based on a combination of “full” credit portfolio modeling and asymptotic results, to calculate capital requirements for name and sector concentration risk in banks’ portfolios. The proposed approach lends itself to be used in bilateral surveillance, as a potential area for technical assistance on banking supervision, and as a policy tool to gauge the degree of concentration risk in different banking systems.

Subject: Asset and liability management, Asset valuation, Banking, Basel II, Credit, Credit risk, Econometric analysis, Financial regulation and supervision, Money, Vector autoregression

Keywords: Asset correlation, Asset valuation, Bank portfolio, Basel capital framework, Basel capital requirements, Basel II, Capital charge, Concentration risk, Credit, Credit risk, Credit VaR, Global, Pillar 2, Requirement formula, Risk factor, Vector autoregression, WP

Publication Details

Pages:

32
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2016/158
Stock No:

WPIEA2016158
ISBN:

9781475523171
ISSN:

1018-5941

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