Credit risk measurement: Evidence of concentration risk in Polish banks’ credit exposures

Abstract

In recent years, there has been a lot of scientific research stressing the importance of understanding and measuring concentration risk in credit portfolios. The article presents credit risk measurement within the capital requirements regulation of the corporate sector. Main objective is to assess the financial stability of the banking sector from a credit risk perspective. The empirical analysis was based on the individual data from different sources (covering the period 2007 -2018), which are as follows: prudential reporting, business register, financial and behavioural data and balance of payments. This paper analyses the exposure of Polish banks to credit risk arising from different economic sectors. The evaluation includes the firm-level probabilities of default, loss given default, expected losses and unexpected losses. The measures of expected and unexpected losses were estimated by using a structural multi-risk factor approach. While conducting the research, it has been noticed that a credit risk differs across various industries as well as at different phases of economic cycle. Furthermore, the research results indicate that both from the standpoint of individual banks and prudential authorities the correlation risk is being underestimated.

Keywords

• corporate sector
• concentration risk
• capital requirements regulation