Credit Risk Concentration

From Open Risk Manual

Definition

Credit Risk Concentration refers to disproportionally large risk exposure to specific credit risks (as opposed to a diversified risk profile).

Regulatory frameworks generally recognize the following specific concentrations risks:

Calculation

There is a large variety of approaches for measuring Concentration Risk. At is simplest it can calculated using a "concentration ratio" which explains what percentage of the outstanding total risk is represented by the largest exposure. For example, if a bank has 5 outstanding loans, with four of equal value and the fifth having twice the value, then the concentration ratio is 1/3. Slightly more sophisticated concentration indicators are e.g. the Herfindahl-Hirschman Index and the Gini Index

Various other considerations may enter into concentration when applying risk analysis in real world applications, most notably:

Mitigation

Credit concentration risk can be controlled with risk management tools such as:

  • Individual limits for name concentration
  • Higher level [[Limit framework | industry and country limits]
  • Hedging of exposures
  • Outright sales of exposures

Issues and Challenges

  • There can be more esoteric forms of concentration risk, for example product concentration which may overlap in part with other forms of concentration

Contributors to this article

» Wiki admin