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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.

Suggested Citation

  • Bandyopadhyay, Arindam, 2011. "Internal Assessment of Credit Concentration Risk Capital: A Portfolio Analysis of Indian Public Sector Bank," MPRA Paper 28672, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:28672
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    References listed on IDEAS

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    1. Klaus Düllmann & Nancy Masschelein, 2007. "A Tractable Model to Measure Sector Concentration Risk in Credit Portfolios," Journal of Financial Services Research, Springer;Western Finance Association, vol. 32(1), pages 55-79, October.
    2. Gordy, Michael B., 2003. "A risk-factor model foundation for ratings-based bank capital rules," Journal of Financial Intermediation, Elsevier, vol. 12(3), pages 199-232, July.
    3. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
    4. 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.
    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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    Cited by:

    1. Richa Verma Bajaj, 2018. "Credit Risk Capital Estimation Under IRB Approach for Banks in India," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 16(2), pages 475-500, June.

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    More about this item

    Keywords

    Portfolio Credit Concentration Risk; Bank Capital;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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