Risks to a bank arising from uneven
Distribution of credit exposures to – individual borrowers (counterparty concentration: a major portion of the loans are extended to just a few borrowers); this also includes loans to companies linked by close business relationships, – individual sectors of the economy (sector concentration), – individual geographical areas (regional concentration) and – individual foreign currency areas (foreign exchange concentration). – For specialized banks – such as home loan and savings banks or ship mortgage banks – and regionally active institutions, however, it can make perfect sense to enter into credit concentration in a planned manner in order to be able to exploit information advantages, as is the case here above all due to special market knowledge or proximity to the location. In the course of risk management, however, special risk measures must be applied in each case and, above all, supervisory concentration limits must be observed. – Concentration risk can be mitigated, among other things, through appropriate securitization procedures. – See Amaranth loss, sector concentration, loan versus paper business, Gini coefficient, group of connected customers, HerfindahlHirschman index, granularity, clump risk, correlation risk, general, credit derivative, credit diversification, leverage ratio, true sale securitization. – Cf. Deutsche Bundesbank Monthly Report of June 2006, pp. 35 ff. (detailed, textbook presentation; overviews, mathematical formulas for calculation), BaFin Annual Report 2006, p. 41 (supervisory guidelines).
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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
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