Concentration Risk under Pillar 2: When are Credit PortfoliosInfinitely Fine Grained?

The ongoing debate concerning credit concentration risk is mainly driven by the requirementson credit risk management due to Pillar 2 of Basel II since risks (e.g. concentration risk) that arenot fully captured by Pillar 1 should be adequately considered in the banks’ risk management. Thisinstruction is indeed relevant since quantifying credit portfolio risk in Pillar 1 is based on an AsymptoticSingle Risk Factor (ASRF) framework in which concentration risk is not covered. Against the backgroundof the ASRF model, we determine the number of credits up to which concentration risk leads toa significant estimation error so that the assumption of an... Marc Gürtler, Dirk Heithecker, Martin Hibbeln]