Explanation:
A credit portfolio is considered to have higher "granularity" when it comprises a large number of relatively small exposures, which reduces concentration risk. By shifting its strategy from making large commercial loans to a few real estate developments to making a larger number of smaller average loans to small businesses, Bastrop Bank increases the granularity of its portfolio. Increased granularity typically leads to better diversification, which significantly lowers the idiosyncratic risk component in Credit VaR calculations.
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24.12.3. Bastrop Bank specializes in making commercial loans to large real estate developments. However, management is considering reducing its exposure to any one development and making smaller average loans to more small businesses. How would this likely affect the granularly on credit VaR?
A
Granularity would decrease as the bank focuses on fewer loans with higher exposure.
B
Granularity would increase as the bank analyzes a larger number of smaller loans.
C
Granularity would not be affected by the loan size or number of borrowers.
D
It's impossible to determine the impact without knowing the current Credit VaR.
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