Product Concentration
From Open Risk Manual
Definition
Product Concentration in the context of Risk Management is a form of Credit Risk Concentration. It arises when a material share of a Credit Portfolio is allocated to a lending product or group of related products that exhibit correlated behaviour because of product features (such as reference to interest rates, foreign currency rates etc.)
Usage
What constitutes a "material share" of the portfolio must be defined in context: For example in relation to total assets, to available risk capital etc. Product concentration depends on various characteristics of the portfolio:
- the number of distinctly different products represented in the portfolio
- the degree of credit dependency between obligors
Recent examples of product concentration are mortgage portfolios, consumer lending portfolios with FX dependency etc.
Effective handling of product concentration requires:
- proper identification of product features that may lead to correlated client behavior
- applying mitigation actions and/or other management actions
Issues and Challenges
- Product concentration is a relatively newcomer in the concentration risk vocabulary. A consistent interpretation and measurement is still lacking, although there are a number of tools available
- Typical concentration risk measures such as the HHI may not be applicable due to the lack of easy classification of products and their corresponding risks
