Book traversal links for E. Credit Concentration Risk
E. Credit Concentration Risk
C 52/2017 STA Effective from 1/4/202178. Section V.D of the ICAAP Standard requires banks to address weaknesses at the portfolio level including credit concentrations risk. Credit concentration risk is the incremental credit loss in a portfolio of credit exposures, caused by high correlation between the credit risk drivers of those exposures. Such concentration risk arises mostly due to high correlations and dependencies between individual obligors (name concentration) or between economic sectors (sectoral concentration). Credit concentration risk can affect a bank’s health or core operations, liquidity, earnings and capital ratios. The Central Bank considers concentration risk as a key material Pillar 2 risk for all UAE banks.
79. Consequently, credit concentration arises when large exposures are associated with a small number of obligors or a small number of sectors, but not only. Credit concentration risk can arise from a seemingly granular portfolio but with high correlation between the obligors’ risk drivers.
80. In accordance with the Central Bank re Large Exposures - Credit Concentrations Limits (Notice No.226/2018), an exposure is deemed large if it accounts for more than 10% of a bank’s capital. Such threshold has been implemented for regulatory purposes. The measurement of concentration risk for risk management purposes and for determining Pillar 2 risk capital requirements should refer to the wider definition of concentration risk. Each bank is exposed to a degree of concentration risk, even when complying with the Large Exposure Regulation.
81. Each bank should perform a detailed risk analysis specific to the Real Estate exposures (RE) of the bank and the Central Bank re Standards for Real Estate Exposures (Notice No. 5733/2021).
82. Credit concentration risk is a common feature of UAE banks, but currently the Central Bank regulations for banks do not include an explicit Pillar 1 capital requirement for name and sector concentration risk. Credit concentration risk is a key prudential risk for which the capital requirement is at the discretion of banks, and it should be held under Pillar 2. This risk should warrant particular attention from each bank. In particular:
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