Deep Learning Based Measure of Name Concentration Risk

Abstract

We propose a new deep learning approach for the quantification of name concentration risk in loan portfolios. Our approach is tailored for small portfolios and allows for both an actuarial as well as a mark-to-market definition of loss. The training of our neural network relies on Monte Carlo simulations with importance sampling which we explicitly formulate for the CreditRisk${+}$ and the ratings-based CreditMetrics model. Numerical results based on simulated as well as real data demonstrate the accuracy of our new approach and its superior performance compared to existing analytical methods for assessing name concentration risk in small and concentrated portfolios.