Enterprise Risk Management in Financial Groups : Analysis of Risk Concentration and Default Risk

In financial groups enterprise risk management is becoming increasingly importantin controlling and managing the different independent legal entities in thegroup. The aim of this paper is to assess and relate risk concentration and joint defaultprobabilities of the group’s legal entities in order to achieve a more comprehensivepicture of a financial group’s risk situation. We further examine the impactof the type of dependence structure on results by comparing linear andnonlinear dependencies using different copula concepts under certain distributionalassumptions. Our results show that even if financial groups with differentdependence structures do have the same risk concentration factor, joint defaultprobabilities of different sets of subsidiaries can vary tremendously.