Study Of Commercial Bank Credit Asset Concentration Risk Control Methods

Concentration risk refers to additional portfolio risk resulting from increased exposure to one obligor or groups of correlated obligors. So there are two reasons that may cause the concentration risk, they are greater exposure to one obligor or greater exposure to correlated obligors.The development of Portfolio Creditrisk Models happened in the 1990s. In this article we would introduce CreditMetrics developed by J.P.Morgan and CreditRisk+ developed by CSFB. They are different in many ways, but here we will explore the basic philosophy they share.Now market economic system is established in our country. The macro-economic fluctuation shows everywhere. So the local banks are under pressure to strengthen their concentration risk management. But to directly apply the model developed by foreign banks seems no good choice, because there are some obstacles. Our banks don' t have enough capacity to acquire the default probability and the loss given default of the obligors, and they are not able to deal with the default correlation.In this article, we developed a new model for our local banks. In order to deal with the industry concentration, we take all the loans to one industry as a portfolio. We can acquire the return of the portfolios, the standard deviations and the correlation rates of the returns. In this way, we will solve the problem by applying the portfolio approach. It is also necessary to avoid the risk concentration to one obligor. We can solve this problem by controlling the effective number of obligors.