Name Concentration Measurement
For any quantification of risks, it is convenient to have quantitative benchmarks, for example to measure the distance from a neutral reference state of no concentration or full diversification. Some concentration/diversification indicators can be simply defined at portfolio level, providing synthetic measures of credit risk name concentration.
- The simplest method to quantify concentration is computing the share of exposure (EAD) held by the k largest customers in the portfolio relative to total exposure.
- Weaknesses of the index are that the choice of k is arbitrary and the index does not use all the information available
- In place of EAD, exposures can be measured as product of EAD*LGD, thus considering the expected severity of losses which can actually differentiate the effective contribution to credit risk.
Gini Index and the Lorenz Curve
- The index G varies between 0 (perfect equality of exposures) to 1 for perfect inequality (limit in which one obligor accounts for the whole exposure and the others tend to zero).
- The index is sensitive to inhomogeneity of exposures but not to exposure number.
- The index reflects both exposures heterogeneity and their number (e.g. in tends to zero with n for homogeneous pool).