Concentration risk refers to the potential for loss that arises when an organization has a high exposure to a single counterparty, sector, or geographic region. This risk occurs when a significant portion of a portfolio is tied to a specific entity or market, making it vulnerable to adverse developments affecting that area. For example, if a bank lends heavily to a single industry or geographic area, an economic downturn in that sector could lead to substantial losses. Effective management involves diversifying investments, setting limits on exposure to individual counterparties or sectors, and conducting regular stress testing to assess the impact of potential concentration scenarios.

Basel scope:

• Pillar 2

Capital requirements:

Mitigated by Capital

Related Links:

•       The Basel framework
•                 BCBS 424 - Basel III: Finalising post-crisis reforms
•                 Basel Framework
•                 BCBS 347 - Revisions to the Standardised Approach for credit risk

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Taxonomy subtypes:

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Geographic concentration
Sector concentration

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Name concentration