An analysis of European banks by Standard & Poor’s Ratings Services has found troublingly high levels of concentration risk.
The analysis shows particularly high single-name risk concentration for banks in Germany, Italy, Portugal, and Sweden. In contrast, the average level is moderate in countries such as France, Spain, or the U.K. Concentration levels are lower in several of the smaller countries such as Switzerland, Belgium, or Denmark.
“The corporate crises of recent years have not reduced banks’ tolerance for concentration risk to any large degree,” said Standard & Poor’s credit analyst Per Tornqvist, lead author of the report, “And large single-name concentrations remain an important potential risk factor in European banking.”
“We found high — sometimes exceedingly high – concentrations,” said Standard & Poor’s credit analyst Bernard de Longevialle, co-author of the report, who noted large differences, however, in concentrations among the banking markets of Europe and among individual banks in each market. The concentrations remain on average high, he explained, despite developments in risk-management techniques and increased disintermediation through the capital markets since the mid-1980s.
In response, Standard & Poor’s is calling on regulators to place more emphasis on this issue and put forward increased public disclosure requirements for concentration risk. “Investors would only stand to benefit from increased public disclosure requirements regarding the size of the large exposures,” said Tornqvist. Although Pillar 2 of Basel II specifically singles out credit concentration as one risk area requiring an assessment by regulators, how they will approach the question is still unclear.