Bandyopadhyay, Arindam (2010): Understanding the Effect of Concentration Risk in the Banks’ Credit Portfolio: Indian Cases.
Download (522kB) | Preview
Credit Concentration Risk has been the specific cause of many occurrences of financial distress of banks world wide. This paper analyzes the credit portfolio composition of a large and medium sized leading public sector Bank in India to understand the nature and dimensions of credit concentration risk and measure its impact on bank capital from different angles. In evaluating the bank wide measures in managing concentration risk, we demonstrate how economic capital approach may enable the bank to assess the impact of regional, industry and individual concentration. We also show how portfolio selection can be done through correlation, stress tests, marginal risk contribution vis-à-vis risk adjusted return that will enable the top management to manage portfolio concentration risk and accordingly plan its capital.
|Item Type:||MPRA Paper|
|Original Title:||Understanding the Effect of Concentration Risk in the Banks’ Credit Portfolio: Indian Cases|
|Keywords:||Credit Concentration, Portfolio Risk, Bank’s Economic Capital|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation
G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
|Depositing User:||Dr. Arindam Bandyopadhyay|
|Date Deposited:||07. Sep 2010 18:42|
|Last Modified:||12. Feb 2013 06:44|
Bandyopadhyay, A., and Chherawala, T., and Saha A. (2007). Calibrating asset correlation for Indian corporate exposures: implications for regulatory capital. The Journal of Risk Finance 8 (4), 330-348. Bangia, A., Diebold, F. X., Kronimus, A., Schagen, C., and Schuermann, T. (2002). Ratings migration and the business cycle, with application to credit portfolio stress testing. Journal of Banking & Finance 26, 445-474. Basel Committee on Banking Supervision (BCBS) (2004). International convergence of capital measurement and capital standards: a revised framework. URL:http://www.bis.org/publ/bcbs107.htm Basel Committee on Banking Supervision (BCBS) (2006a). International convergence of capital measurement and capital standards: a revised framework-comprehensive version. URL:http://www.bis.org/publ/bcbs128.htm Basel Committee on Banking Supervision (BCBS) (2006b). Studies on credit risk concentration: an overview of the issues and a synopsis of the results from the research task force project. BIS working paper no. 15. Black, F., and Scholes, M. (1973). The pricing of options and corporate liabilities. Journal of Political Economics 81, 637-659. Bonti, G., Kalkbrener, M., Lotz, C., and Stahl, G. (2006). Credit risk concentrations under stress. The Journal of Credit Risk 2 (3), 115 – 136. Carey, M. (2000). Dimensions of credit risk and their relationship to economic capital requirements. Working Paper 7629, National Bureau of Economic Research, March. Cowan, A. M., and Cowan, C. D. (2004). Default correlation: an empirical investigation of a subprime lender. Journal of Banking & Finance 28 (4), 753-771. Crouhy, M., Galai, D., and Mark. R. (2000). A comparative analysis of current credit risk models. Journal of Banking & Finance 24, 59-117. Das, S., Duffie, D., Kapadia, N., and Saita, L. (2007). Common failings: how corporate defaults are correlated. Journal of Finance 42 (1), 93-118. Davis, P. O., and Williams, D. (2004). Credit risk measurement: avoiding unintended results-part2-weighting on defaults-knowing your institution’s default metrics. The RMA Journal. 86 (8), 82-85. De Servigny, A. and Renault, O. (2003). Correlations evidence. RISK. 16 (7), 90-94. Dev, A. (2004). Economic Capital: A Practitioner Guide. RISK Book, September. Düllmann, K., and Masschelein, N. (2007). “A tractable model to measure sector concentration risk in credit portfolios. Journal of Financial Services Research 32 (1-2), 55-79. Gini, C., (1921). Measurement of inequality and incomes. The Economic Journal (31), 124–126. Gordy, M., and Heitfield, E. (2002). Estimating default correlations from short panels of credit rating performance data. working paper, Federal Reserve Board, Washington DC. Gordy, M. B. (2000). A comparative anatomy of credit risk models. Journal of Banking & Finance 24 (1-2), 119-149. Gordy, M., (2003). A risk-factor model foundation for ratings-based bank capital rules, Journal of Financial Intermediation 12 (3), 199–232. Gwinner, W. B, and Saunders, A. (2008). “The sub prime crisis: implications for emerging markets. Policy Research Working Paper, No. 4726, The World Bank. Heitfield, E., Burton, S., and Chomsisengphet, S. (2006). Systematic and idiosyncratic risk in syndicated loan portfolios. Journal of Credit Risk 2, 3-31. Helbekkmo, H. (2006). Retail banks and economic capital: special issues and opportunities: Part 1. RMA Journal, October, 62-68. Kwoka, J.E., (1977). Large firms dominance and price cost margins in manufacturing industries. Southern Economic Journal 44, 183–189. Loffler, G. (2003). The effects of estimation error on measures of portfolio credit risk. Journal of Banking & Finance 27, 1427-1453. Lopez, J.A. (2004). The empirical relationship between average asset correlation, firm probability of default, and asset size. Journal of Financial Intermediation 13 (2), 265-83. Lorenz, M.C., (1905). Methods of measuring the concentration of wealth. Journal of the American Statistical Association 9, 209–219. Lucas, A., Klaassen, P., Spreij, P., and Straetmans, S. (2001). An analytical approach to credit risk of large corporate bond and loan portfolios. Journal of Banking & Finance 25, 1635-1664. Lucas, D.J. (1995). Default correlation and credit analysis. Journal of Fixed Income 4 (4), 76-87. McNeil, A., Frey, R.., and Embrechts, P. (2005). Quantitative Risk Management: Concepts, Techniques and Tools. Princeton University Press. Merton, R. (1974). On the pricing of corporate debt: the risk structure of interest rates. Journal of Finance 28, 449-470. Nagpal, K. and Bahar, R. (2001). Measuring default correlation. RISK, 14 (March), 129-132. Nickell, P., Perraudin, W., Varotto, and S. (2000). Stability of rating transitions. Journal of Banking and Finance 24, 205-229. Reserve Bank of India (April 2007). Guidelines for Implementation of the New Capital Adequacy Framework. DBOD Circular, Mumbai, India. Reynolds. D. (2009). Analyzing concentration risk. Technical Paper, Algorithmics Software LLC.URL:http://www.algorithmics.com/EN/media/pdfs/Algo-WP0109 AnalyzingConRisk.pdf. Taylor, J. (2002). A unified approach to credit limit setting. RMA Journal 84 (10), 56-61. Theil, H. (1967). Economics and information theory. Chicago: Rand McNally and Company. Uberti, P., and S. Figini (2010). How to measure single-name credit risk concentrations. European Journal of Operational Research 202 (1), 232-238. Zhang, J., Zhu, F., and Lee, J. (2008). Asset correlation, realized default correlation, and portfolio credit risk. Moody’s KMV technical working paper. URL: http://www.moodyskmv.com/research/files/wp/Asset_Correlation_and_Portfolio_Risk.pdf. Zhou, C. (1997). Default correlation: an analytical result. Working Paper, Federal Reserve Board, Washington, D.C.