Concentration Risk and Banks Performance

The Asymptotic Single Risk Factor (ASRF) model underpinnings of the Internal Ratings-Based (IRB) capital rules presume that the bank portfolio is fully diversified with respect to individual borrowers. When there are material name concentrations of exposure, there will be a residual of undiversified idiosyncratic risk in the portfolio, and the IRB formula will understate the required economic capital. This form of credit concentration is sometimes known as lack of granularity. The aim of the project is to empirically measure granularity adjustment and compare it with other model based and ad-hoc measures of name concentration and also to develop a model to improve banks performance taking granularity adjustment into consideration.