Concentration Risk in Credit Portfolios
Modeling and management of credit risk are the main topics within banks and other lending institutions. Historical experience shows that, in particular, concentration of risk in credit portfolios has been one of the major causes of bank distress. Therefor
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D. Filipovic, Chair
EAA Lecture Notes is a series supported by the European Actuarial Academy (EAA GmbH), founded on the 29 August, 2005 in Cologne (Germany) by the Actuarial Associations of Austria, Germany, the Netherlands and Switzerland. EAA offers actuarial education including examination, permanent education for certified actuaries and consulting on actuarial education. actuarial-academy.com
Eva Lütkebohmert
Concentration Risk in Credit Portfolios
With 17 Figures and 19 Tables
Eva Lütkebohmert Universität Bonn Inst. für Gesellschafts- und Wirtschaftswissenschaften Adenauerallee 24-42 53113 Bonn Germany [email protected]
ISBN 978-3-540-70869-8
e-ISBN 978-3-540-70870-4
DOI 10.1007/978-3-540-70870-4 EAA Lecture Notes ISSN 1865-2174 Library of Congress Control Number: 2008936503 c 2009 Springer-Verlag Berlin Heidelberg This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permission for use must always be obtained from Springer. Violations are liable to prosecution under the German Copyright Law. The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Cover design: WMXDesign GmbH, Heidelberg Printed on acid-free paper 9 8 7 6 5 4 3 2 1 springer.com
Preface
The modeling and management of credit risk is the main topic within banks and other lending institutions. Credit risk refers to the risk of losses due to some credit event as, for example, the default of a counterparty. Thus, credit risk is associated with the possibility that an event may lead to some negative effects which would not generally be expected and which are unwanted. The main difficulties, when modeling credit risk, arise from the fact that default events are quite rare and that they occur unexpectedly. When, however, default events take place, they often lead to significant losses, the size of which is not known before default. Although default events occur very seldom, credit risk is, by definition, inherent in any payment obligation. Banks and other lending institutions usually suffer severe losses when in a short period of time the quality of the loan portfolio deteriorates significantly. Therefore, modern society relies on the smooth functioning of the banking and insurance systems and has a collective interest in the stability of such systems. There exist, however, several examples of large derivative losses like Orange County (1.7 billion US$), Metallgesellschaft (1.3 billion US$) or Barings (1 billion US$), which took
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