Academic journal article Academy of Banking Studies Journal

Concentration in Lending: Commercial vs Financial Credits

Academic journal article Academy of Banking Studies Journal

Concentration in Lending: Commercial vs Financial Credits

Article excerpt


The availability of credit for an enterprise is affected by the amount of risk weighing on the moneylender. If, for example, the amount of the loan is significant, the performance of the financial intermediary could be significantly impacted by the trend of the largest counterparties' creditworthiness.

The literature identifies two major approaches to the measurement of the concentration risk: the single name approach with regard to the individual perspective, and the sectoral / geographic approach encompassed in the portfolio perspective.

The effectiveness of the two approaches for measuring the concentration risk in risk control may be affected by the financial or commercial nature of the liability underlying the financial contract.

Indeed, with a view to safeguarding the stability of a financial intermediary, the prudential regulations currently in force require the financial intermediaries to comply with capital adequacy guidelines in the face of the concentration of risk. The computation of the regulatory requirement is realized according to the single name perspective and, at present, it does not take into account the financial or commercial nature of large exposures.

This paper deals with the effectiveness of the tools which check concentration risk according to the single name approach and the sectoral / geographic approach with respect to the portfolio financing of the exposures represented by financing liability or current liabilities for the enterprise. Based on a review of both the literature and the current prudential regulations, this paper proposes an empirical verification of the degree of concentration of financial and commercial credit portfolios using these two main approaches. Initially, the paper refers to the most authoritative academic literature on the single name and sectoral / geographical concentration risk (paragraph 2) looking at the implications of the approaches with respect to exposures having a financial and a commercial nature (paragraph 2.1) and at the regulatory context for the Italian market (paragraph 2.2). With a view to ascertaining the hypotheses being formulated, the paper proposes an empirical analysis of the Italian credit system based on a comparison of the concentration and risk exposure between portfolios of financial and commercial exposures according to the two approaches referred to above (paragraph 3). The last paragraph is devoted to a few concise conclusions (paragraph 4).


The riskiness of a financial intermediary's credit portfolio depends on both a systemic risk which may not be ameliorated by diversification and a non-systemic risk linked to the specific characteristics of specific trustworthy customers. By increasing the number of customers and applying the classical principles for diversifying a portfolio of financial activities, the relevance of the specific risk tends to decrease (Santomero, 1997) in a way that is more than merely proportional to the decrease in the performance that may be connected with such a diversification strategy (Elyasiani & Deng, 2004).

The exposure to a specific credit portfolio risk is estimated by taking into account the level of concentration of the portfolio and adopting either the single name measurement approach or the approach based on sectoral/geographical characteristics (Kamp, Pfingsten & Porath, 2005). The first approach assumes that the characteristics of the customers of a financial intermediary are so heterogeneous that the concentration risk may only be assessed by taking into consideration the exposure toward each customer. The importance of the analysis of the level of concentration is justified in literature in the face of:

* the collusion risk between major customers and financial intermediaries; and

* the risk of illiquidity of the assets.

High levels of exposure toward individual customers may be a sign of a lower ability of the financial intermediary to impose its contractual conditions and to manage the credit process in an efficient manner. …

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