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Are large credit exposures a source of concentration risk?

Author

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  • Jan Nokkala

    (University of Eastern Finland, Department of Finance and Accounting)

Abstract

Credit concentration risk may be the largest risk for a bank. The division into non-granular and granular portfolios based on portfolio size and individual credit sizes is essential for assessing the concentration risk of a portfolio. This paper identifies portfolio-specific large credits as a source of concentration and evaluates the effects of these to portfolios risks. Choices on risk measures and assumptions on portfolio structure are aligned with those on previous studies, which enables previous research to be complemented with results on large credits. The use of parameters and portfolio sizes from actual portfolios increases the applicability of the results. The results show that accumulating large equally- -sized credits has both increasing and decreasing implications to concentration risk following initial portfolio structure. In the smallest portfolios the share of granularity exceeds 80% of credit risk. A novel risk-weight add-on formulation with a unified interpretation for banks using standardized methods or internal ratings-based method is also introduced.

Suggested Citation

  • Jan Nokkala, 2022. "Are large credit exposures a source of concentration risk?," Bank i Kredyt, Narodowy Bank Polski, vol. 53(4), pages 375-398.
    • Handle: RePEc:nbp:nbpbik:v:53:y:2022:i:4:p:375-398
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    File URL: https://bankikredyt.nbp.pl/content/2022/04/bik_04_2022_02.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    risk measurement; concentration risk; credit risk; Basel regulation;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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