Product Concentration

Definition

Product Concentration in the context of Risk Management is a form of Credit Risk Concentration. It arises when a material share of a Credit Portfolio is allocated to a lending product or group of related products that exhibit correlated behaviour because of product features (such as reference to interest rates, foreign currency rates etc.)

Usage

What constitutes a "material share" of the portfolio must be defined in context: For example in relation to total assets, to available risk capital etc. Product concentration depends on various characteristics of the portfolio:

• the number of distinctly different products represented in the portfolio
• the degree of credit dependency between obligors

Recent examples of product concentration are mortgage portfolios, consumer lending portfolios with FX dependency etc.

Effective handling of product concentration requires:

• proper identification of product features that may lead to correlated client behavior
• applying mitigation actions and/or other management actions

Issues and Challenges

• Product concentration is a relatively newcomer in the concentration risk vocabulary. A consistent interpretation and measurement is still lacking, although there are a number of tools available
• Typical concentration risk measures such as the HHI may not be applicable due to the lack of easy classification of products and their corresponding risks

References

• EBA:Guidelines on concentration risk

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