Name Concentration (also Single Name Concentration or Single Borrower 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.
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)
- the Credit Dependency between exposures in the portfolio
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