Assessing Credit Concentration Risk Using the Herfindahl-Hirschman Index and Its Impact On Bank Loan Quality (Published)
The purpose of this research is to evaluate the relationship between bank loan quality and credit concentration risk, which is measured by the Herfindahl-Hirschman Index. We investigate the relationship between concentration risk and non-performing loan indicators using descriptive statistics and simple linear regression for the years 2017–2023. Although there are probably other variables at play, the study indicates that worse loan quality tends to be associated with greater concentration risk. To effectively manage credit risk, banks are advised to diversify their portfolios even further and use a comprehensive multivariate modelling methodology that takes macroeconomic and policy factors into account.
Keywords: HH Index, NPL, credit concentration risk, loan quality