Credit risk concentrations under stress

Gabriel Bonti, Michael Kalkbrener, Christopher Lotz, Gerhard Stahl

Abstract

ABSTRACT

This article deals with methods for identifying as well as stressing risk concentrations in credit portfolios, in particular concentrations caused by large exposures to a single sector or to several highly correlated sectors. We present a general and yet computationally efficient framework for implementing stress scenarios in a multifactor credit portfolio model and illustrate the proposed methodology by stressing a large investment banking portfolio. Although the methodology is developed in a particular factor model, the main concept – stressing sector concentration through a truncation of the distribution of the risk factors – is independent of the model specification. We introduce the concept of factor concentration that formalizes the proposed approach and analyze its mathematical properties.