Modeling and management of credit risk are the main topics within banks and other lending institutions. Historical experience shows that, in particular, concentration of risk in credit portfolios has been one of the major causes of bank distress. Therefore, concentration risk is highly relevant to anyone who wants to go beyond the very basic portfolio credit risk models.
The book gives an introduction to credit risk modeling with the aim to measure concentration risks in credit portfolios. Taking the basic principles of credit risk in general as a starting point, several industry models are studied. These allow banks to compute a probability distribution of credit losses at the portfolio level. Besides these industry models the Internal Ratings Based model, on which Basel II is based, is treated.
On the basis of these models various methods for the quantification of name and sector concentration risk and the treatment of default contagion are discussed. The book reflects current research in these areas from both an academic and a supervisory perspective
EAA Lecture Notes Editors H. Bühlmann A. Pelsser W. Schachermayer H. Waters D. Filipovic, Chair EAA Lecture Notes is a series supported by the European Actuarial Academy (EAA GmbH), founded on the 29 August, 2005 in Cologne (Germany) by the Actuarial Associations of Austria, Germany, the Netherlands and Switzerland. EAA offers actuarial education including examination, permanent education for certified actuaries and consulting on actuarial education. actuarial-academy.com Eva Lütkebohmert Concentration Risk in Credit Portfolios With 17 Figures and 19 Tables Eva Lütkebohmert Universität Bonn Inst. für Gesellschafts- und Wirtschaftswissenschaften Adenauerallee 24-42 53113 Bonn Germany
[email protected] ISBN 978-3-540-70869-8 e-ISBN 978-3-540-70870-4 DOI 10.1007/978-3-540-70870-4 EAA Lecture Notes ISSN 1865-2174 Library of Congress Control Number: 2008936503 c 2009 Springer-Verlag Berlin Heidelberg This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permission for use must always be obtained from Springer. Violations are liable to prosecution under the German Copyright Law. The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Cover design: WMXDesign GmbH, Heidelberg Printed on acid-free paper 9 8 7 6 5 4 3 2 1 springer.com Preface The modeling and management of credit risk is the main topic within banks and other lending institutions. Credit risk refers to the risk of losses due to some credit event as, for example, the default of a counterparty. Thus, credit risk is associated with the possibility that an event may lead to some negative effects which would not generally be expected and which are unwanted. The main difficulties, when modeling credit risk, arise from the fact that default events are quite rare and that they occur unexpectedly. When, however, default events take place, they often lead to significant losses, the size of which is not known before default. Although default events occur ve