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Internal Assessment of Credit Concentration Risk Capital: A Portfolio Analysis of Indian Public Sector Bank

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  • Bandyopadhyay, Arindam

Abstract

This paper aims at working out a more risk sensitive measure of concentration risk and captures its impact in terms of capital number that will help the bank’s top management to manage it efficiently as well as meet the regulatory compliance. We have designed a more risk sensitive measures like expected loss based Hirschman-Herfindahl Index (HHI), loss correlation approach (single as well as multi factor), credit value at risk (C-VaR) based on bank’s internal loss data history that would measure credit concentration and suggest the amount of capital required to cover concentration risk. Using detailed borrower wide, facility wide, industry and regional loan portfolio data of a mid sized public sector bank in India, our paper attempts to provide a detail insight into measurement of concentration risk in credit portfolio and understand its impact in terms of economic capital for the bank as a whole. Regulators and other stakeholders worldwide are asking for more accurate and precise measure of concentration risk in terms of capital numbers. The detailed analysis and methods used in this paper is an attempt to find out a solution in this direction.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 28672.

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Date of creation: 31 Jan 2011
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Handle: RePEc:pra:mprapa:28672

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Keywords: Portfolio Credit Concentration Risk; Bank Capital;

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  1. Arindam Bandyopadhyay & Tasneem Chherawala & Asish Saha, 2007. "Calibrating asset correlation for Indian corporate exposures: Implications for regulatory capital," Journal of Risk Finance, Emerald Group Publishing, vol. 8(4), pages 330-348, August.
  2. Klaus Düllmann & Nancy Masschelein, 2007. "A Tractable Model to Measure Sector Concentration Risk in Credit Portfolios," Journal of Financial Services Research, Springer, vol. 32(1), pages 55-79, October.
  3. Michael B. Gordy, 2002. "A risk-factor model foundation for ratings-based bank capital rules," Finance and Economics Discussion Series 2002-55, Board of Governors of the Federal Reserve System (U.S.).
  4. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
  5. Egloff, Daniel & Leippold, Markus & Vanini, Paolo, 2007. "A simple model of credit contagion," Journal of Banking & Finance, Elsevier, vol. 31(8), pages 2475-2492, August.
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