Credit Concentration Risk Management Back in Regulatory Focus

by Chris Couch, McGlinchey Stafford

Late last year the Office of the Comptroller of the Currency identified “concentration risk management” as a top supervisory concern for 2019. Subsequently, the Federal Reserve raised interest rates twice, the US economy witnessed the worst annual returns for the main equity benchmarks since 2008 and stocks witnessed the worst December since 1931. As a result, Boards should revisit the idea of concentration risk, how to identify it, and strategies for mitigating it.

As the Comptroller’s Handbook points out, concentration risk is a close cousin to credit risk:

Credit risk management does not conclude with the supervision of individual transactions, it also encompasses the management of pools of exposures whose collective performance has the potential to affect a bank negatively even if each individual transaction within a pool is soundly underwritten. When exposures in a pool are sensitive to the same economic, financial or business development, that sensitivity may cause the sum of the transactions to perform as if it were a single, large exposure.


Loans to unrelated borrowers that share a common characteristic could pose considerable risk to a bank’s earnings and capital where the common characteristic becomes a source of weakness. For instance, loans to separate real estate developers or home builders may have very different borrower profiles and sound underwriting. Each, however, may be exposed to long-term interest rates in that the ultimate take-out financing is driven by consumer purchases. Given the disparity among borrowers, these loans might be expected to perform independently of each other. Their common exposure to consumer end-users, though, particularly when geographically similar, may make them perform (or underperform) as a common whole.

Additional Complication

As the example above indicates, concentrations can accumulate across products, geographies and business lines. This can make concentrations harder to spot and harder to protect against. Products containing the same types of risks under different labels and in different units can mask some exposures and risks.  On their face, HELOCs and developer loans may not seem to have much in common. Given their shared exposure to long-term interest rates, though, a Board might want to review them collectively.

Defining Concentrations
From a regulatory perspective, “concentrations” are aggregate commitments and exposures – on a firm-wide basis – that exceed 25 percent of the bank’s capital.  Not all pools will support this threshold, though, and banks should determine – based on volatility, correlation to other pools, and similar measures – how narrowly to define “concentration” for any given pool. From an underwriting perspective, Boards should consider the following (among other things) when assessing pools and concentrations:

  • interrelations among counterparties/borrowers
  • common sources of repayment (including guarantors)
  • independent borrowers with common suppliers or customers
  • common industries and economic sectors
  • geographic location or areas served


Once identified, Boards should recognize that mitigation strategies vary from pool to pool. Some include:

  • Modify underwriting standards to strengthen credit portfolio
  • Expand portfolio to include non-correlated borrowers
  • Actively monitor and manage low-quality assets
  • Sell participations or whole loans
  • Alter exposure limits or credit risk standards
  • Hold additional capital to adjust for the additional risk

The fundamental responsibility for identifying and managing concentration risk lies with the Board. In light of the OCC’s supervisory priorities for the year and the topsy-turvy nature of the current economy, directors should revisit their bank’s approach to concentrations, correlated pools, and the risk associated with each.

Chris Couch is a partner in McGlinchey Stafford’s Financial Institutions practice, where he advises banks and boards of directors on corporate compliance, operational risk, and commercial lending matters.