• BANK Part 5.2 BANK Part 5.2 Concentration risk

    • BANK 5.2.1 BANK 5.2.1 Concentration risk

      Concentration risk to a banking business firm arises if the firm is exposed to 1 counterparty, or to 2 or more counterparties that are not truly independent of each other, and the total of the exposures to the counterparty or counterparties is large enough to endanger the firm’s liquidity or solvency.

      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

      • BANK 5.2.1 Guidance

        1 Significant sources of concentration risk include:
        (a) concentration of exposures to a single counterparty or connected counterparties;
        (b) concentration of exposures to counterparties in the same industry, sector, region or country; and
        (c) concentration of exposures to counterparties whose financial performance depends on the same activity or commodity.
        2 A concentration of exposures would also arise if a firm accepts collateral or credit protection provided by a single provider.
        Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 5.2.2 BANK 5.2.2 Policies — concentration risk sources and limits

      (1) A banking business firm’s concentration risk policy must set limits for acceptable concentrations of risk, consistent with the firm’s risk tolerance, risk profile and capital. The limits must be made known to, and must be understood by, all relevant staff.
      (2) The policy must ensure that:
      (a) the firm’s information systems identify exposures creating risk concentrations and large exposures to single counterparties or connected counterparties, aggregate those exposures and facilitate their management; and
      (b) all significant such concentrations and exposures are reviewed regularly and reported to the firm’s governing body or senior management.
      Derived from QFCRA RM/2014-2 (as from 1st January 2015).

      • BANK 5.2.2 Guidance

        A banking business firm's policies should be flexible to help the firm to identify risk concentrations. To achieve this, the systems should be capable of analysing the firm's credit portfolio by:

        •   size of exposure
        •   exposure to connected counterparties
        •   product
        •   geography
        •   industry or sector (for example, manufacturing and industrial)
        •   account performance
        •   internal credit risk assessment
        •   funding
        •   outstandings versus commitments
        •   types and coverage of collateral.
        Derived from QFCRA RM/2014-2 (as from 1st January 2015).

    • BANK 5.2.3 Relation to stress-testing

      When carrying out stress-testing or review of stress scenarios, a banking business firm must take into account significant risk concentrations and large exposures, and the effects of changes in market conditions and risk factors on them.

      Derived from QFCRA RM/2014-2 (as from 1st January 2015).