Concentration Risk in Credit Portfolios

Specialeforsvar ved Søren Gyldenløve

Titel: Concentration Risk in Credit Portfolios

Abstract: Financial regulators ask banks to calculate credit risk capital in two steps. As a first step, banks should calculate required capital using a set of standard regulatory formulas. These formulas have been developed within a model framework in which the loan portfolio is assumed to be perfectly diversified. In practice, however, loan portfolios are concentrated and therefore banks must, in a second step, calculate a concentration specific capital requirement. In this thesis we examine a methodology for estimation of the concentration specific capital requirement. In doing this we apply a multi-factor model to measure and compare loan portfolio concentration. The concentration measures we estimate numerically, with simulations, as well as analytically using Pykhtin’s multi-factor adjustment. Finally, we demonstrate how to calibrate the measures of concentration to a so-called benchmark loan portfolio. We propose a methodology for estimation of a geographical concentration capital requirement. This methodology is tested on a portfolio of a diversified Nordic bank. To our knowledge, this has not been done previously. We conclude that the suggested methodology is suited for calculation of geographic concentration capital requirement. Due to unacceptable levels of variation in the simulations we recommend to implement the proposed methodology using Pykhtin’s analytical multi- factor adjustment.

Vejledere: Rolf Poulsen & Jens Dick-Nielsen
Censor: Christoffer Kanstrup