Abstract
This paper addresses the need to measure the concentration risk in credit portfolios, which is not captured by banks’ minimum capital requirements in the internal rating-based approaches under Basel II. Concentration risk can arise from an unbalanced distribution of exposures to single borrowers (single name concentrations) or sectors (sectoral concentrations), the latter being more difficult to discern and address using quantitative models. Simple concentration indices, an extension of the single-factor model on which the regulatory minimum capital requirements are based and more complex multi-factor portfolio models are presented as tools to quantify these risks. A case study-like numerical example demonstrates their use and confirms their relative importance for the measurement of portfolio credit risk.
Published Version
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