The Research Of Controlling Concentration Risk Based On Default Correlation

The credit portfolio is one of the most important aspects of the banks'risk management. Undoubtedly the main and important future development direction of the banks'credit management will lie in the field that how to transfer from the existing traditional portfolio management built up mainly by single or large-scale projects, to the positive portfolio management with an overall view of the situation which can withstand the risks on its own initiative as well as generate revenues at the same time.Basel Committee on Banking Supervision announced the new BaselⅡin 2004, in which the three pillars of banking supervision is confirmed, and among all those operational risks of banks, credit risk is identified as the biggest risk. The internal ratings method is required to use to measure economic costs under the framework of The first pillar of BaselⅡ, and the asymptotic single risk factor(ASRF)model is also put into practice as the basic model to measure economic costs. The model is based on two assumptions:(1) the portfolio contains only one systematic risk factor; (2) the heterogeneous risk is fully distributed of the portfolio. But in reality the credit portfolio can not often meet the above two assumptions, first, a large part of the customers shares a high degree of correlation within the same portfolio, once a customer goes bankruptcy because of his mismanagement, that can always result in those customers who have a close association in assets with him generating default risks. Second, banks often provide loans to those relatively popular industries in pursuit of high profits. Of course it can bring high returns to the banks in a certain period of time, but on the other hand it may result in excessive concentration of credit, if the industry goes into a decline cycle, the loss arising from the concentration risk can be incalculable. Thereby, it will be more conductive to take the default correlation and concentration risks of the credit portfolio into consideration in aspect of economic capital management.Firstly, this paper summarizes the international measure of default correlation methods and specific calculating method is brought forward based on the actual operability. Secondly, the contents of concentration risk have been introduced and a general solution is given to customer concentration and industry concentration. A default correlation based on the degree of concentration risk control portfolio optimization model is built on the basis of the above combining with portfolio optimization theory. According to the data from a commercial bank, The following conclusions can be drawn (1) We can obtain the optimal program allocation of inter-industry based on the theory of portfolio assets which consider the industry return rate and default correlation.in accordance with the investment portfolio,the concentration risk can be controlled in a certain degree.(2) Empirical analysis can be seen that industry profitability and investment do not match.It is not enough to allocate assets only from benefits and risks,we should make historical data as a reference,analysis and forecasting the external environment changes.then weigh the benefit and risk.(3) In the principle of minimum risk and certain return,first,concentration risks are controlled.the bank can calculate the economy capital according the risk exposure when the risk occurs.Second,the bank can price the credit assets reasonable according the value at risk.with the quantitative analysis of risk and return,it is convenient for bank to manage performance evaluation.