Semi-analytical implementation for the name concentration measurement in a credit portfolio

Abstract

Basel II is the second of the Basel Accords, which are recommendations on banking regulations issued by the Basel Committee on Banking Supervision. The purpose of Basel II, which was initially published in 2004, is to create an international standard that regulators can use, about how much capital banks need to cover the potential losses derived from its nancial activities. We concentrate in credit risk, which is the most important risk a bank has to deal with. Basel II is structured in a three pillar framework. Pillar one sets out details for adopting more risk sensitive minimal requirements, so called regulatory capital, for banking organizations. Pillar two lays out principle for the supervisory review process of capital adequacy and Pillar three seeks to establish market discipline by enhancing transparency in banks nancial reporting. The Pillar one capital charge for credit risk is based on the Asymptotic Single-Risk Factor (ASRF) model, also called Vasicek model. The regulatory capital requirements are calculated evaluating the credit portfolio loss distribution at the 99% condence level. One of its important assumptions is that a portfolio is well diversi ed, this is, there is no exposure (or name) concentration among obligors in the credit portfolio. In the real world, however, this main assumption is violated and then the measured risk can be underestimated.