Capital for concentrated credit portfolios

Arbeitspapier

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, substantial computation time, and fail to clearly identify the most important credits causing concentration risk. In this article, I illustrate three approaches for calculating loss distributions and value-at-risk capital requirements. Of these, the large exposure approach proposed by Kupiec (2015) is especially easy to implement. It produces accurate estimates of the economic capital required for a concentrated portfolio and immediately identifies the obligors most responsible for generating concentration risk.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: AEI Economics Working Paper ; No. 2015-06

Classification and Topics

• Classification: Wirtschaft
• Subject: capital requirements ; Basel Comittee on Banking Supervision

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Kupiec, Paul H.
• Event: Veröffentlichung
• (who): American Enterprise Institute (AEI)
• (where): Washington, DC
• (when): 2015

Further information

• Handle: http://hdl.handle.net/10419/280526
• Last update: 10.03.2025, 11:42 AM CET