The Analytics of Risk Model Validation
A collection of papers in this new and developing area of research, this book focuses on the quantitative side of model validation and covers model validation in credit, market, and operational risk.
TABLE OF CONTENTS The Analytics of Risk Model Validation
Chapter 5: Measuring Concentration Risk in Credit Portfolios
Klaus Duellmann [*]
Abstract
This paper addresses the need to measure the concentration risk in credit portfolios, which is not captured by banks minimum capital requirements in the internal rating-based approaches under Basel II. Concentration risk can arise from an unbalanced distribution of exposures to single borrowers (single name concentrations) or sectors (sectoral concentrations), the latter being more difficult to discern and address using quantitative models. Simple concentration indices, an extension of the single-factor model on which the regulatory minimum capital requirements are based and more complex multi-factor portfolio models are presented as tools to quantify these risks. A case study-like numerical example demonstrates their use and confirms their relative importance for the measurement of portfolio credit risk.
[*] Deutsche Bundesbank, Frankfurt, Germany. The views expressed here are my own and do not necessarily reflect those of the Deutsche Bundesbank.
1. Concentration Risk and Validation
An important innovation in the internal ratings-based (IRB) approach of Basel II is the introduction of model-based risk weight functions to determine the risk-weighted assets for credit risk in the banking book. As the IRB risk weight functions are already given by the new Framework, the internal validation process does not focus on the underlying IRB model itself but instead on its input variables, namely the probability of default (PD), the loss given default (LGD) and the exposure at default (EAD). More precisely, validation in this context encompasses a range of processes and activities that contribute to an assessment of whether ratings adequately...
Copyright Elsevier Ltd. 2008 under license agreement with Books24x7
