Modeling Credit Portfolio Concentration Risk Under Basel Frameworks
Summary
The document discusses approaches to modeling concentration risk in credit portfolios within the Basel IRB context. One approach starts from the Asymptotic Single Risk Factor model and modifies it to align with Basel II, then compares sector concentration models for accuracy and runtime. The cited monograph is presented as a detailed source, but the document does not give its model specifications or comparative findings.
A second proposal incorporates concentration through liquidity horizons by increasing effective maturity according to exposures across credit state, industry, region, and other groupings. The increase is represented using weights that would need to follow Basel III guidance, with maturity modeled over a range rather than as a fixed point. This is a conceptual suggestion, not a fully specified or validated method; the answer also notes that liquidation horizons and selling effects matter, while the required weights and implementation details are not supplied.
Key ideas
- A Basel II concentration model can modify the Asymptotic Single Risk Factor framework.
- Sector concentration models may be compared on accuracy and computational runtime.
- A proposed Basel III-related adjustment raises effective maturity as portfolio concentration increases across specified groupings.
- Concentration weights and the liquidity-horizon adjustment require regulatory guidance and further specification.
Tags
Full text
# Concentration risk in credit portfolio
# Concentration risk in credit portfolio
How do you model concentration risk of credit portfolio in IRB/Basel II framework?
## Answer by olaker (score 11, accepted)
https://quant.stackexchange.com/a/120
There is a fairly recent (2010) monograph by Martin Hibbeln entirely devoted to this very question. He starts with the standard Asymptotic Single Risk Factor model and shows how it can be modified in order to be consistent with the Basel II framework. He also compares the accuracy and runtime of several modern models which have been developed to measure sector concentration risk.
## Answer by user7056 (score 5)
https://quant.stackexchange.com/a/4044
Via Liquidity Horizons $LH$ (which have to be taken into consideration anyway when modelling for $Basel_3$) as function of the specific concentrations $c$'s.
Increasing the effective maturity of the contract, $M_0+LH_0$, by a quantity proportional to its concentrations with respect to different slicings magnifies the credit risk. $M_0$ is the maturity specified for the contract, $LH_0$ is the LH originally assigned (in the absence of concentration risk/interactions with other contracts).
The maturity is simullated to be within $[M_0+LH_0, M_0+ LH_0 + {\Delta}LH)$ having, let's say, ${\Delta}LH=w_{creditState}*c_{creditState} + w_{industry}*c_{industry}+w_{region}*c_{region}+...$
The weights $w$s are to be chosen as per $Basel_3$ directives.
The presence of a horizon $LH$s selling period has to get reflected anyway/icebergs detection while deterministic selling point in time time/maturity of the contract as a point in time generates modelling risk.Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.