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Measuring sectoral/geographic concentration risk


  • Vincenzo Tola

    () (Banca d'Italia)


This article focuses on the application of the Pykhtin model to the Italian banking system to measure concentration risk by industry sector and geographic region. The proposed approach generalizes the portfolio model used in Pillar 1 for the calculation of the capital requirement, removing the assumptions of the existence of one systematic risk factor and of an infinitely granular portfolio. The difference between the unexpected loss stemming from the Pykhtin model and that calculated using the supervisory formula can be interpreted as a measure of concentration risk. The Pykhtin model is consistent with the Basel II framework. It accordingly generates an unexpected loss measure that is in line with the IRB capital requirements. The proposed model therefore has the advantage of �speaking the language of supervisors�. This approach makes it possible to interpret the difference between regulatory and economic capital. It also enables concentration risk to be broken down into its two components: single-name and sectoral/geographic concentration risk. The empirical results show the model�s ability to generate internally coherent rankings that are close to the economic intuition: exposure to sectoral/geographic concentration risk is negatively correlated to banks�size.

Suggested Citation

  • Vincenzo Tola, 2010. "Measuring sectoral/geographic concentration risk," Questioni di Economia e Finanza (Occasional Papers) 72, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:opques:qef_72_10

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    References listed on IDEAS

    1. Pennacchi, George & Vermaelen, Theo & Wolff, Christian C. P., 2014. "Contingent Capital: The Case of COERCs," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 49(03), pages 541-574, June.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters,in: This Time Is Different: Eight Centuries of Financial Folly Princeton University Press.
    3. Francesco Cannata & Mario Quagliariello, 2005. "The Value of Market Information in Banking Supervision: Evidence from Italy," Journal of Financial Services Research, Springer;Western Finance Association, vol. 27(2), pages 139-162, April.
    4. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
    5. Reinhart, Karmen & Rogoff, Kenneth, 2009. ""This time is different": panorama of eight centuries of financial crises," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 77-114, March.
    6. Luc Laeven & Fabian Valencia, 2010. "Resolution of Banking Crises; The Good, the Bad, and the Ugly," IMF Working Papers 10/146, International Monetary Fund.
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    More about this item


    Basel 2; concentration risk; economic capital; VaR;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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