Sector concentration risk from a financial institution (FI) perspective refers to the potential for loss that arises when a significant portion of the institution’s lending or investment portfolio is concentrated in a specific industry or sector. This risk can lead to vulnerabilities if that sector faces economic downturns, regulatory changes, or other adverse conditions, potentially impacting the creditworthiness of borrowers and the value of investments. Effective management involves diversifying the portfolio across multiple sectors, conducting thorough sector-specific risk assessments, monitoring industry trends, and setting limits on exposure to any single sector to mitigate potential adverse impacts.

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