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Capital for concentrated credit portfolios

Author

Listed:
  • Kupiec, Paul

    (American Enterprise Institute, USA)

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.

Suggested Citation

  • Kupiec, Paul, 2015. "Capital for concentrated credit portfolios," Journal of Risk Management in Financial Institutions, Henry Stewart Publications, vol. 8(4), pages 314-322, October.
    • Handle: RePEc:aza:rmfi00:y:2015:v:8:i:4:p:314-322
    as

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    References listed on IDEAS

    as
    1. M. B. Gordy & E. Lutkebohmert, 2013. "Granularity Adjustment for Regulatory Capital Assessment," International Journal of Central Banking, International Journal of Central Banking, vol. 9(3), pages 38-77, September.
    2. Gordy, Michael B., 2003. "A risk-factor model foundation for ratings-based bank capital rules," Journal of Financial Intermediation, Elsevier, vol. 12(3), pages 199-232, July.
    3. Paul H. Kupiec, 2015. "Portfolio diversification in concentrated bond and loan portfolios," AEI Economics Working Papers 837343, American Enterprise Institute.
    4. Gordy, Michael B. & Marrone, James, 2012. "Granularity adjustment for mark-to-market credit risk models," Journal of Banking & Finance, Elsevier, vol. 36(7), pages 1896-1910.
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    More about this item

    Keywords

    portfolio diversification; idiosyncratic default risk; obligor concentration; Vasicek single common factor model of credit risk; credit value at risk; Basel bank capital requirements;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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