{
  "title": "Measuring Concentration Risk - A Partial Portfolio Approach",
  "publication": "IMF Working Papers, August 2, 2016",
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  "summary": "Concentration risk is an important feature of many banking sectors, especially in emerging and small economies. Under the Basel Framework, Pillar 1 capital requirements for credit risk do not cover concentration risk, and those calculated under the Internal Ratings Based (IRB) approach explicitly ex",
  "sections": [
    {
      "heading": "Summary",
      "content": "- Concentration risk is an important feature of many banking sectors, especially in emerging and small economies.\n- Under the Basel Framework, Pillar 1 capital requirements for credit risk do not cover concentration risk, and those calculated under the Internal Ratings Based (IRB) approach explicitly exclude it.\n- Banks are expected to compensate for this by autonomously estimating and setting aside appropriate capital buffers, which supervisors are required to assess and possibly challenge within the Pillar 2 process.\n- Inadequate reflection of concentration risk can lead to insufficient capital levels even when the capital ratios seem high.\n- The paper proposes a flexible technique, based on a combination of “full” credit portfolio modeling and asymptotic results, to calculate capital requirements for name and sector concentration risk in banks’ portfolios.\n- The proposed approach lends itself to use in bilateral surveillance, as a potential area for technical assistance on banking supervision, and as a policy tool to gauge the degree of concentration risk in different banking systems."
    },
    {
      "heading": "Key Findings and Contributions",
      "content": "- The paper identifies gaps in the Basel capital framework with respect to concentration risk coverage under Pillar 1 and the IRB approach.\n- It emphasizes the supervisory role under Pillar 2 to assess banks’ own capital buffers for concentration risk.\n- It offers a methodological contribution: a hybrid technique combining full credit portfolio modeling and asymptotic results to quantify capital requirements for name and sector concentration."
    },
    {
      "heading": "Methodology (brief)",
      "content": "- Combines “full” credit portfolio modeling with asymptotic results to evaluate capital charges attributable to name concentration and sector concentration in bank portfolios.\n- Intended as a flexible technique applicable across different banking systems and supervisory contexts."
    },
    {
      "heading": "Policy Implications and Uses",
      "content": "- Use in bilateral surveillance to assess banking system concentration risk.\n- Potential area for technical assistance on banking supervision.\n- Tool for supervisors and policymakers to gauge the degree of concentration risk and to guide Pillar 2 deliberations on capital buffers.\n\n---\n\n Content in this bundle\n\n- wp16158\n  - wp16158 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - wp16158 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/31/measuring-concentration-risk-a-partial-portfolio-approach-44163"
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    "Authors: Pierpaolo Grippa, Lucyna Gornicka",
    "Published: August 2, 2016",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781475523171.001",
    "Concentration risk is an important feature of many banking sectors, especially in emerging and small economies.",
    "Under the Basel Framework, Pillar 1 capital requirements for credit risk do not cover concentration risk, and those calculated under the Internal Ratings Based (IRB) approach explicitly exclude it.",
    "Banks are expected to compensate for this by autonomously estimating and setting aside appropriate capital buffers, which supervisors are required to assess and possibly challenge within the Pillar 2 process.",
    "Inadequate reflection of concentration risk can lead to insufficient capital levels even when the capital ratios seem high.",
    "The paper proposes a flexible technique, based on a combination of “full” credit portfolio modeling and asymptotic results, to calculate capital requirements for name and sector concentration risk in banks’ portfolios.",
    "The proposed approach lends itself to use in bilateral surveillance, as a potential area for technical assistance on banking supervision, and as a policy tool to gauge the degree of concentration risk in different banking systems.",
    "The paper identifies gaps in the Basel capital framework with respect to concentration risk coverage under Pillar 1 and the IRB approach.",
    "It emphasizes the supervisory role under Pillar 2 to assess banks’ own capital buffers for concentration risk.",
    "It offers a methodological contribution: a hybrid technique combining full credit portfolio modeling and asymptotic results to quantify capital requirements for name and sector concentration.",
    "Combines “full” credit portfolio modeling with asymptotic results to evaluate capital charges attributable to name concentration and sector concentration in bank portfolios.",
    "Intended as a flexible technique applicable across different banking systems and supervisory contexts.",
    "Use in bilateral surveillance to assess banking system concentration risk.",
    "Potential area for technical assistance on banking supervision.",
    "Tool for supervisors and policymakers to gauge the degree of concentration risk and to guide Pillar 2 deliberations on capital buffers.",
    "**_wp16158**"
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