Migration and concentration risks in bank lending: new evidence from credit portfolio data

In this paper, we analyze migration and concentration risks by means of individual borrower data from a commercial lending portfolio of a German universal bank during the period 2001-2004. With respect to migration risk, we find that default is non-absorbing, rating stability does not decline monotonously by rating grades, and alternative ways of calculating migration matrices lead to very different outcomes. Analyzing concentration risk, we find that the evolution of concentration on single names differs across measures whereas concentration on industries has consistently increased. Moreover, the credit portfolio gets more similar to benchmark portfolios during the sampling period. Finally, stress tests reveal that the bank’s credit value at risk is very sensitive to the rating distribution, leading to +/-50 % changes of its current economic capital