InvestorQ : What is the meaning of Credit Concentration Risk?
Vidya Sandeep made post

What is the meaning of Credit Concentration Risk?

Rohan Bhadani answered.
3 weeks ago
It refers to excessively large risk exposure to specific credit risk, unlike a diversified risk profile where risk is categorized proportionately. There are several types of concentration risks, such as:

  • Sector Concentration
  • Name-based concentration
  • Geographic concentration
  • Product concentration

In other words, when an individual or a group of exposures move together in an adverse direction there is a potential for loss in the value of that investment, which is called concentration risk. So, it measures how well-diversified a company’s/bank’s lending is.

So, to measure the credit risk concentration, detailed information about exposures such as sector assignment, loan-level data, etc. If you look at the records, credit risk concentration has been one of the major reasons for bank distress for both individual institutions as well as banking systems at large.

It could be controlled with various risk management tools such as:

  1. Setting up the higher-level industry and country limits
  2. Setting individual limits for name concentration
  3. Outright sales of exposures
  4. Hedge exposures