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Internal Assessment of Credit Concentration Risk Capital: A portfolio analysis of Indian public sector bank

by Arindam Bandyopadhyay of the National Institute of Bank Management (NIBM), Pune

January 31, 2011

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.

JEL Classification: G32, G21.

Keywords: Portfolio Credit Concentration Risk, Bank Capital

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