Rita Skridulytė

Department of Finance and Accounting, Kaunas faculty of humanities

Vilnius University, Lithuania

E-mail: skridulyte@gmail.com

THE MEASUREMENT OF CONCENTRATION RISK IN LOAN PORTFOLIOS

Eduardas Freitakas

Department of Finance and Accounting, Kaunas faculty of humanities

Vilnius University, Lithuania

E-mail: eduardas.freitakas@vukhf.lt

ABSTRACT. The current financial and economic situation, as well as requirements of consumers changes very quickly. For this reason, banks have to update their portfolio of the services all the time. Nevertheless, lending remains one of the most important and most profit-generating activities for the banks. Providing loans, banks are exposed with many risks: credit risk, liquidity risk, market risk, operational risk and others. Usually, the most important risk is credit risk. Often it comes from undue concentration of loan portfolios. Concentration risk in loan portfolios arises from uneven distribution of credit across sectors or providing large loans to individual borrowers. In this context, this article analyses definition and importance of concentration risk in the loan portfolio. Causes of concentration risk and methods that are used to measure concentration risk are also examined in this article. The third part of this article analyses how the loan portfolio changed in Lithuanian bank’s during 2004 - 2010 years. Concentration risk in the loan portfolio, depending on the loans given for different sectors of economic activity, is measured in this article as well.

Received: February, 2012

1st Revision: March, 2012

Accepted: April, 2012

JEL Classification: H81, G32, E51, P2

Keywords: loan portfolio, concentration, risk, credit, economic activities, Lithuania.