Name Concentration Measurement

From Open Risk Manual


The quantitative assessment of the degree to which a portfolio may be excessively concentrated in a particular Exposure / Counterparty


For any quantification of risks, it is convenient to have quantitative benchmarks, for example to measure the distance from a neutral reference state of no concentration or full diversification. Some concentration/diversification indicators can be simply defined at portfolio level, providing synthetic measures of credit risk name concentration.

Concentration ratio

  • The simplest method to quantify concentration is computing the share of exposure (EAD) held by the k largest customers in the portfolio relative to total exposure.
  • Weaknesses of the index are that the choice of k is arbitrary and the index does not use all the information available
  • In place of EAD, exposures can be measured as product of EAD*LGD, thus considering the expected severity of losses which can actually differentiate the effective contribution to credit risk.

Gini Index and the Lorenz Curve

  • The index G varies between 0 (perfect equality of exposures) to 1 for perfect inequality (limit in which one obligor accounts for the whole exposure and the others tend to zero).
  • The index is sensitive to inhomogeneity of exposures but not to exposure number.

Herfindhahl-Hirschman Index

  • The index reflects both exposures heterogeneity and their number (e.g. in tends to zero with n for homogeneous pool).