Concentration risk

Concentration risk is a banking term describing the level of risk in a bank's portfolio arising from concentration to a single counterparty, sector or country.

The risk arises from the observation that more concentrated portfolios are less diverse and therefore the returns on the underlying assets are more correlated.

Concentration risk is usually monitored by risk functions, committees and boards within commercial banks and is normally only allowed to operate within proscribed limits. It is also monitored by banking regulators and generally attracts a higher capital charge in banking regulation.