Name Concentration

From Open Risk Manual

Definition

Name Concentration (also Single Name Concentration) is a form of Credit Risk Concentration, describing a condition in which a Credit Portfolio has a material share allocated to a single counterparty or a group of related counterparties linked by specific ties (e.g. corporate group).

What constitutes a "material share" must be defined in context: For example in relation to total assets, to available risk capital etc.

Factors

The degree of name concentration (and associated risk) depends on various characteristics of the portfolio:

  • the number of counterparties of the portfolio (the concentration risk is generally higher for a lower number of counterparties)
  • the heterogeneity of the exposure size (the risk is higher when some exposures dominate)
  • the underlying credit risk of the counterparties (large counterparties of poor credit

being key drivers)

Mitigation

Effective handling of name concentration requires:

  • proper identification (aggregation) of exposures
  • measuring concentration using appropriate metrics
  • a framework for monitoring and reporting name concentrations
  • applying mitigation actions and/or other management actions in accordance

with that framework

Issues and Challenges

  • Name concentration requires a valid aggregation of exposure to a counterparty. This task can have many gray areas in reality there can be a wide range of legal and economic dependencies between legal entities
  • Despite the long standing recognition of this risk, a consistent interpretation and measurement is still lacking, although there are a number of tools available

See Also

References


Contributors to this article

» Wiki admin