Measuring Concentration Risk in Bank Credit Portfolios using Granularity Adjustment: Practical Aspects

The paper analyses the practical aspects of granularity adjustment for quantification of the contribution of name concentrations to portfolio risk: proposals are made for the unique choice of systemic risk variance; aggregation of credit risk parameters from exposure to counterparty level is analysed; granularity adjustment capital allocation to individual counterparts is being discussed, proposing to include single name granularity adjustment capital into performance measures and risk based pricing tools; Monte Carlo approach for estimating single name concentration risk capital is being introduced. Practical aspects of granularity adjustment estimation are illustrated by empirical calculations using real bank portfolio data and the comparison with Gordy and Ltkebohmert results is presented.