2019/05/31 by Davide Cellai, Cellai, Davide, Trevor Fitzpatrick +1
Business, Management and Accounting · Economics, Econometrics and Finance · #Banking stability, regulation, efficiency #Credit Risk and Financial Regulations #FOS: Economics and business #Financial Distress and Bankruptcy Prediction #General Finance (q-fin.GN) #Risk Management (q-fin.RM)
paper · pdf · doi:10.48550/arxiv.1905.13711
openalex publication_date 2019/05/31 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
Measurement and management of credit concentration risk is critical for banks and relevant for micro-prudential requirements. While several methods exist for measuring credit concentration risk within institutions, the systemic effect of different institutions' exposures to the same counterparties has been less explored so far. In this paper, we propose a measure of the systemic credit concentration risk that arises because of common exposures between different institutions within a financial system. This approach is based on a network model that describes the effect of overlapping portfolios. This network metric is applied to synthetic and real world data to illustrate that the effect of common exposures is not fully reflected in single portfolio concentration measures. It also allows to quantify several aspects of the interplay between interconnectedness and credit risk. Using this network measure, we formulate an analytical approximation for the additional capital requirement corresponding to the systemic risk arising from credit concentration interconnectedness. Our methodology also avoids double counting between the granularity adjustment and the common exposure adjustment. Although approximated, this common exposure adjustment is able to capture, with only two parameters, an aspect of systemic risk that can extend single portfolios view to a system-wide one.