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Most financial institutions have policies to identify and limit concentration risk. This typically involves setting certain thresholds for various types of risk. Once these thresholds are set, they are managed by frequent and diligent reporting to assess concentration areas and identify elevated
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Each bank should identify, measure, monitor, and control risk by implementing an effective risk management system appropriate for the size and complexity of its operations. When examiners assess the effectiveness of a bank's risk management system, they consider the bank's policies, processes,
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To illustrate, a portfolio with 10 equally sized loans would have a concentration ratio of 0.1 or 10%, whereas a portfolio of 10 loans - 9 equally sized and 1 equal to half the value of the portfolio would have a concentration ratio of 0.27 or 27%.
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Concentration risk is usually monitored by risk functions, committees and boards within commercial banks and is normally only allowed to operate within proscribed limits. It is also monitored by banking regulators and generally attracts a higher
472:
As a concept, concentration risk is used in other financial and non-financial sectors. For example, several types of concentration risk are used in investment management, in the economic analysis of monopolies (via the
407:
There are two types of concentration risk. These types are based on the sources of the risk. Concentration risk can arise from uneven distribution of exposures (or loan) to its borrowers. Such a risk is called
460:
thresholds. A key component to the management of concentration risk is accurately defining thresholds across various concentrations to minimize the combined risks across concentrations. See
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is used to calculate the degree of concentration to a single name, sector of the economy or country. Separate concentration ratios must be calculated for each type of concentration.
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For a single loan, the concentration ratio is simply the proportion of the portfolio the loan represents (e.g. a $ 100 loan in a $ 1000 portfolio would have a ratio of 0.1 or 10%)
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The ratio is useful for bankers or investors at large to identify when a portfolio may be excessively exposed to the risk that a
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term describing the level of risk in a bank's portfolio arising from concentration to a single counterparty, sector or country.
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or downturn in one sector of the economy or another country may cause a high proportion of the bank's outstanding loans to
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Concentration risk can be calculated for a single bank loan or whole portfolio using a "concentration ratio".
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611:"Using the Lorenz Curve to Characterize Risk Predictiveness and Etiologic Heterogeneity"
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The risk arises from the observation that more concentrated portfolios are less
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from economics is used to analyze the concentration of risk in a population.
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and therefore the returns on the underlying assets are more correlated.
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574:. International Association of Credit Portfolio Managers. 2022.
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572:"Risk mitigation techniques in credit portfolio management"
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467:
556:"Principles for the Management of Concentration Risk"
46:. Unsourced material may be challenged and removed.
499:"Concentrations of Credit, Comptroller's Handbook"
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621:(4). National Institute of Health: 531–537.
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561:. Malta Financial Services Authority. 2010.
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507:Office of the Comptroller of the Currency
106:Learn how and when to remove this message
462:Financial risk management § Banking
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468:Concentration risk in other disciplines
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44:adding citations to reliable sources
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585:"Concentrate on Concentration Risk"
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952:Conditional Value-at-Risk (CVaR)
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521:personnel, and control systems.
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1074:Asset and liability management
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627:10.1097/EDE.0000000000000499
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849:Operational risk management
414:sectoral concentration risk
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1021:Proportional hazards model
972:Interest rate immunization
475:Herfindahl-Hirschman Index
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690:financial risk management
455:Monitoring and management
431:For a whole portfolio, a
967:First-hitting-time model
932:Arbitrage pricing theory
609:Mauguen, Audrey (2016).
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1276:Stress test (financial)
982:Modern portfolio theory
410:name concentration risk
399:in banking regulation.
1314:Investment management
1216:Investment management
942:Replicating portfolio
718:Sovereign credit risk
1319:Mathematical finance
1251:Risk-return spectrum
1241:Mathematical finance
1196:Fundamental analysis
1129:Exchange traded fund
713:Consumer credit risk
544:on December 6, 2013.
534:"Concentration Risk"
55:"Concentration risk"
40:improve this article
1309:Financial economics
1266:Statistical finance
1032:Value-at-Risk (VaR)
937:Black–Scholes model
777:Holding period risk
1286:Structured product
1281:Structured finance
1261:Speculative attack
947:Cash flow matching
910:Non-financial risk
807:Interest rate risk
733:Concentration risk
412:. Another type is
378:Concentration risk
330:Non-financial risk
185:Interest rate risk
157:Concentration risk
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1099:Corporate finance
1094:Capital structure
1048:Cash flow at risk
1044:Liquidity at risk
1017:Survival analysis
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864:Reputational risk
738:Credit derivative
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289:Reputational risk
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1201:Growth investing
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1034:and extensions (
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841:Operational risk
826:Refinancing risk
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540:. Archived from
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510:. October 2020
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51:Find sources:
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35:
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29:This article
27:
23:
18:
17:
1246:Moral hazard
1231:Risk of ruin
1007:Sharpe ratio
869:Country risk
830:Deposit risk
732:
728:Default risk
618:
615:Epidemiology
614:
604:
592:. Retrieved
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542:the original
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512:. Retrieved
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479:Lorenz curve
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314:Moral hazard
299:Country risk
238:Deposit risk
167:Default risk
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83:
76:
69:
62:
50:
38:Please help
33:verification
30:
1350:Credit risk
1296:Toxic asset
1256:Speculation
1189:social work
1174:engineering
1002:Risk parity
987:Omega ratio
900:Profit risk
787:Equity risk
765:Volume risk
753:Market risk
705:Credit risk
594:October 12,
514:October 12,
420:Calculation
323:Profit risk
200:Equity risk
176:Market risk
143:Credit risk
1334:Categories
879:Legal risk
859:Model risk
773:Shape risk
769:Basis risk
697:Categories
485:References
309:Legal risk
261:Model risk
66:newspapers
1226:Risk pool
1139:Financial
445:recession
1149:analysis
1084:Bad debt
962:Drawdown
924:Modeling
645:27096256
1164:betting
1154:analyst
1144:adviser
797:FX risk
636:5495014
449:default
389:diverse
382:banking
80:scholar
1206:Hazard
957:Copula
824:(e.g.
763:(e.g.
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633:
82:
75:
68:
61:
53:
1211:Hedge
1169:crime
1159:asset
992:RAROC
888:Other
589:FINRA
559:(PDF)
502:(PDF)
403:Types
380:is a
87:JSTOR
73:books
1221:Risk
1184:risk
688:and
641:PMID
596:2023
516:2023
59:news
1179:law
1124:ESG
631:PMC
623:doi
42:by
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