Name Concentration Risk and Pillar 2 Compliance: The Granularity Adjustment
Independent thesis Advanced level (degree of Master (One Year)), 20 credits / 30 HE creditsStudent thesis
A credit portfolio where each obligor contributes infinitesimally to the risk is said to be infinitely granular. The risk related to the fact that no real credit portfolio is infinitely granular, is called name concentration risk.
Under Basel II, banks are required to hold a capital buffer for credit risk in order to sustain the probability of default on an acceptable level. Credit risk capital charges computed under pillar 1 of Basel II have been calibrated for a specific level of name concentration. If a bank deviates from this benchmark it is expected to address this under pillar 2, which may involve increased capital charges.
Here, we look at some of the difficulties that a bank may encounter when computing a name concentration risk add-on under pillar 2. In particular, we study the granularity adjustment for the Vasicek and CreditRisk+ models. An advantage of this approach is that no vendor software products are necessary. We also address the questions of when the granularity adjustment is a coherent risk measure and how to allocate the add-on to exposures in order to optimize the credit portfolio. Finally, the discussed models are applied to real data
Place, publisher, year, edition, pages
2013. , 51 p.
Credit Risk; Basel II; IRB formula; Concentration risk; Name concentration;
Probability Theory and Statistics
IdentifiersURN: urn:nbn:se:kth:diva-110098OAI: oai:DiVA.org:kth-110098DiVA: diva2:586165
Subject / course
Master of Science in Engineering -Engineering Physics
UppsokPhysics, Chemistry, Mathematics
Hult, Henrik, Docent