Concentration Risk

Portfolio concentration measures the degree to which exposure is distributed across segments. The OCC and Federal Reserve use the Herfindahl-Hirschman Index (HHI) to classify concentration risk: below 1,500 is unconcentrated, 1,500–2,500 is moderately concentrated, and above 2,500 is highly concentrated. This analysis applies that framework to the lending portfolio by loan grade.

Portfolio HHI

1,429

OCC Classification

Unconcentrated

HHI Thresholds: Below 1,500 = Unconcentrated | 1,500–2,500 = Moderately Concentrated | Above 2,500 = Highly Concentrated. The OCC and Fed use these thresholds to determine whether a bank's lending portfolio requires enhanced concentration risk management.

Grade-Level Exposure Distribution

The chart above shows how portfolio exposure is distributed across loan grades. Grades with disproportionate share relative to their count indicate larger average loan sizes in those segments, which amplifies concentration risk beyond simple loan count distribution.

HHI Contribution by Grade

Each grade's HHI contribution equals its market share squared. Dominant grades contribute exponentially more to concentration. Reducing the largest grade's share by even a few percentage points can meaningfully lower portfolio HHI.

Cumulative Exposure (Lorenz Curve Proxy)

The Lorenz curve illustrates inequality in exposure distribution. A perfectly diversified portfolio would show a straight diagonal line. The steeper the initial rise, the more concentrated the portfolio. The area between the curve and the diagonal line corresponds to the Gini coefficient.

Concentration Detail: Exposure, Risk, and HHI

No Results

So What? Concentration Risk Recommendations

1. Monitor HHI Quarterly: Establish automated HHI tracking by grade, purpose, and geographic dimensions. Set internal thresholds (e.g., HHI > 2,000) that trigger portfolio review before regulatory thresholds are breached.

2. Diversify High-Concentration Grades: If a single grade exceeds 25% of portfolio exposure, consider adjusting origination targets or pricing to rebalance. Excessive concentration in any single segment amplifies losses during sector-specific stress events.

3. Link Concentration to Capital Planning: Use HHI trends as an input to CCAR/DFAST capital adequacy calculations. Concentrated portfolios require higher capital buffers under OCC guidance, directly impacting return on equity.

Methodology: HHI = sum of squared market shares (each share expressed as a percentage of total). A portfolio with 10 equal segments would have HHI = 1,000 (10 × 10²). OCC thresholds from the Comptroller's Handbook on Concentration Risk (2020).