Name concentration correction
Jasper Hommels and Viktor Tchistiakov describe the implementation of a simple analytical framework for the name concentration measurement that occurs in a credit portfolio due to imperfect diversification of idiosyncratic risk. The result is an intuitive correction on the perfectly granular portfolio framework
The Pillar I capital charge for credit risk (see Basel Committee on Banking Supervision, 2006a) is based on the asymptotic single-risk factor (ASRF) model (see Basel Committee on Banking Supervision, 2006b) for credit risk. One of its important assumptions is that a portfolio is well diversified. Thus one can calculate the required capital by focusing only on systemic risk. In the real world, however, the idiosyncratic risk of a portfolio cannot be fully diversified away. This violates the key
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