Answer:
The purpose of monitoring concentrations of credit is to:
- Guide Bank management in the structuring of the loan portfolio
- Ensure the credit needs of the Bank's service area are met;
- Provide sufficient diversification of risk in the loan portfolio
Consider the following categories:
- Loans and other obligations, funded or unfunded, to one borrower
- Loans collateralized by a single security or debt instrument, or securities or debt instruments with common characteristics
- Loans to a company dominant in the local economy, its employees or major suppliers - consider the consumer loan exposure to major employers in the bank's market area
- Loans dependent on one industry group
- Loans dependent on a single collateral type or collateral type with common characteristics (i.e., commercial real estate)
- Loans dependent on one crop or herd type
- Loans considered out of normal territory
Monitoring Concentrations of Credit
Measurement: Total amount of a concentration exceeds 50% of total capital and the average dollar weighted risk rating of the concentration exceeds 5.0 (Less than Acceptable) at quarter end.
Action: Senior Lending Officer is required to prepare a plan to improve quality or reduce concentration to acceptable level, or otherwise mitigate the risk to the bank.
Example: As total of loans within a concentration approach 80% of the bank's limit, lending may be limited to current customers, loan-to-value limit requirements increased or other underwriting criteria adjusted.
First published on BankersOnline.com 11/24/08
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