GRP 1 Concentration Risk

CONCENTRATION RISK
Group I Presentation
OUTLINE
 INTRODUCTION
 DEFINITION – CONCENTRATION RISK
 RISK CONCENTRATION LIMITS
 CRITERIA FOR THE QUANTIFICATION OF RISK POSITIONS
 GUIDANCE FOR BANKS ON CONCENTRATION RISK MANAGEMENT
 CHALLENGES
 CONCLUSION
INTRODUCTION
Concentration is a common feature of Nigerian banks at
individual, industry and geographical levels. There are some
few individuals in Nigeria for example whose names have
become recurring decimals in banks’ credit records. These
very few individuals sometimes control as high as 40% of a
bank’s total credit portfolio.
At the industry level, bank facilities are almost always
concentrated in one or two industries in Nigeria. Such
industries may include Oil & Gas and Telecommunications.
This trend is not significantly different in the case of
geographical distributions and can result in huge losses in the
event of counterparty defaults or systemic crisis. For
example, the high credit concentration to the capital
DEFINITIONS – Concentration Risk
 According to the Basel Committee, Concentration Risk can be defined
as any single direct and/or indirect exposure or group of exposures with
the potential to produce losses large enough to threaten an institutions
health or its ability to maintain its core business.
 It may be described as that volume or level of credit facilities of all
kinds, which is capable of threatening the supervisory capital of a bank.
Therefore, it is usually viewed in relation to the capital and its adequacy
to a bank.
 Concentration Risk can take many forms including exposures to:
individual counterparties, groups of individual counterparties or related
entities, counterparties in specific geographic locations, industry
sectors, specific products e.t.c.
 However, for purposes of our discussion, the regulations have
established limits on the size of exposures to individual borrowers as
RISK CONCENTRATION LIMITS
 Regulators in an effort to mitigate the threats to bank stability associated with
exposures that are large relative to supervisory capital, established limits on the size
of exposures to individual borrowers and on the overall level of large exposures.
◦ Banks and banking groups shall limit each risk position to not more than 25% of
supervisory capital by the Basel committee and 20% obtained in our jurisdiction.
◦ In the case of exposures to a bank, investment firm or a group of customers
connected with either a bank or an investment firm, 25% limit can be exceeded if;
 The sum of the risk position against any customers connected not exceed 25%
of the supervisory capital.
 The assumption that the risk position does not exceed 100% of the regulatory
capital.
 However, the some exposures are not subject to the limits: For instance
◦ Funding, including those for leases, approved but not yet signed or whose
contracts are otherwise not yet effective.
◦ The exposure resulting from the failure of the settlement after the expiry of the
following transactions: Delivery Versus Payment (DVP ) and none DVP.
CRITERIA FOR THE QUANTIFICATION OF
RISK POSITIONS
A weighting system is used in the quantification of

concentration risk.
 Under this system, exposures are recognised at their nominal
value (100% risk weight) while taking into account any credit
risk mitigation techniques.
 To allow for the lower risk associated with certain borrower
counterparties and the presence of credit protection, the risk
weights as set out in a bank’s risk management framework
shall be applied.
GUIDANCE FOR CONCENTRATION RISK
MANAGEMENT
 Banks should obtain all the necessary information to evaluate
any type of legal and economic connections between clients.
 Particular attention should be paid in assessing any economic
connections in relation to the exposure of an amount
exceeding 2% of the capital.
 Banks should have clear policies and key procedures approved
by the Board of Directors in relations to exposures on
concentration risk.
 Banks should have appropriate internal processes to identify,
manage, monitor and report concentration risks which are
apparent to the nature, scale and complexities of their
business.
GUIDANCE FOR BANKS ON CONCENTRATION
RISK MANAGEMENT Cont’d
 Banks should have adequate arrangements in place for actively
monitoring, managing concentration risks against agreed policies and
limits, threshold or similar concepts.
 Banks should assess the amount of internal capital they consider to be

adequate to hold against the level of concentration risk in their
portfolio.
 Some practical measures employed in the reduction of concentration

risk are ;
◦ Diversification of credit portfolio: Achieved by classifying its

exposures across various risk classes, industries, geography and
individual counterparties.
◦ Allowing negative correlation between its various exposures.

CHALLENGES
 Part of the factors that caused the recent crises in the
Nigerian banking industry were the systemic weaknesses
which allowed banks to concentrate on certain products,
business lines and legal entities. The collective exposures of
which negatively affected the banking system.
 In Nigeria, the common mistake is that banks lend to
perceived viable sectors without undertsanding the dynamics
inherent in such sectors e.g Oil & Gas, Telecommunications
and Power.
CONCLUSION
 Banks should undertake the assessment of concentration risk as part of
their ICAAP in a transparent way. In doing so, they should take account of
a range of relevant factors, including the quality of their risk
management and other internal systems and controls, ability to take
effective management action to adjust levels of concentration risk and
the implications of stress-testing and scenario analysis.
 The role of capital needs to be assessed within this broader context, and
keeping in mind that the weight attached to the different factors will vary
from institution to institution.
 The expectation is that the higher the levels of concentration, the greater
the onus will be on institutions to demonstrate how they have assessed
the implications in terms of internal capital.
THANK YOU

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CONCENTRATION RISK

A weighting system is used in the quantification of

 Banks should assess the amount of internal capital they consider to be

 Some practical measures employed in the reduction of concentration

◦ Diversification of credit portfolio: Achieved by classifying its

◦ Allowing negative correlation between its various exposures.

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