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FRM Part II · FRM Exam Part II · Portfolio Credit Risk

A credit portfolio manager observes that a bank's loan book is concentrated in a single large borrower making up 15% of exposure. Which measure most directly addresses this name concentration, as opposed to sector concentration?

A granularity adjustment is the measure that addresses single-name concentration. It adds capital for large lumpy exposures where idiosyncratic risk has not been diversified away, which the asymptotic single-factor framework assumes away. The other options do not directly target name concentration.

  1. AGranularity adjustment to the capital charge for single-name concentrationCorrect
  2. BIncreasing the systematic factor correlation parameter
  3. CLowering average portfolio LGD assumptions
  4. DExtending the horizon of the VaR measure from one year to ten years

Explanation

Name concentration means idiosyncratic risk is not diversified away. A granularity adjustment adds capital for lumpy exposures that violate the asymptotic single-factor model's infinite granularity assumption. The other choices do not target single-name concentration.

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