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Credit Portfolio Sector Concentration and Its Implications for Capital Requirements

In: CNB Financial Stability Report 2014/2015

Author

Listed:
  • Libor Holub
  • Michal Nyklicek
  • Pavel Sedlar

Abstract

This article assesses whether the sector concentration of the portfolio of loans to resident and non-resident legal entities according to information from the Central Credit Register (CCR) indicates a need for additional capital requirements under Pillar 2. A simplified version of the factor model is used for this purpose. The Herfindahl-Hirschman Index (HHI) is employed to indicate the degree of sector concentration and its long-term tendencies. The results of the factor model, which takes account of an institution's risk profile, signal a possible need for additional economic capital for portfolios featuring higher sector concentration and higher risk. In such cases, supervisors should evaluate whether sector concentration risk is correctly measured, assessed and incorporated into capital requirements in the bank's internal capital adequacy assessment process (ICAAP).

Suggested Citation

  • Libor Holub & Michal Nyklicek & Pavel Sedlar, 2015. "Credit Portfolio Sector Concentration and Its Implications for Capital Requirements," Occasional Publications - Chapters in Edited Volumes, in: CNB Financial Stability Report 2014/2015, chapter 0, pages 131-138, Czech National Bank.
    • Handle: RePEc:cnb:ocpubc:fsr1415/3
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    Cited by:

    1. Natalia Nehrebecka, 2023. "Distribution of credit-risk concentration in particular sectors of the economy, and economic capital before and during the COVID-19 pandemic," Economic Change and Restructuring, Springer, vol. 56(1), pages 129-158, February.

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