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Measuring Concentration Risk for Regulatory Purposes

by Marc Gürtler of the Technical University at Braunschweig,
Martin Hibbeln of the Technical University at Braunschweig, and
Clemens Vöhringer of the Technical University at Braunschweig

September 5, 2009

Abstract: The measurement of concentration risk in credit portfolios is necessary for the determination of regulatory capital under Pillar 2 of Basel II as well as for managing portfolios and allocating economic capital. Existing multi-factor models that deal with concentration risk are often inconsistent with the Pillar 1 capital requirements. Therefore, we adjust these models to achieve Basel II-compliant results. Within a simulation study we test the impact of sector concentrations on several portfolios and contrast the accuracy of the different models. In this context, we also compare Value at Risk and Expected Shortfall regarding their suitability to assess concentration risk.

JEL Classification: G21, G28.

Keywords: Concentration Risk, Pillar 2, Multi-Factor Models, Economic Capital, Simulation Study, Value at Risk, Expected Shortfall.

Published in: Journal of Risk, Vol. 12, No. 3, (Spring 2010), pp. ??-??.

Previously titled: Adjusting Multi-Factor Models for Basel II-consistent Economic Capital

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