Concentration frameworks used to have time on their side. In today’s market, risks can surface and compound so quickly that limits on paper aren’t enough unless they’re tied to loss tolerance, clean data, and a playbook you can execute fast, experts say in a recent ProSight article.
Here are some practical takeaways:
Start with loss tolerance and board alignment. Jim Lentino, chief risk officer at Wintrust, urged banks to anchor concentration governance in a clear view of what leadership is actually willing to absorb. Speaking during a recent ProSight discussion, he said: “Start early with the conversation about how much you’re willing to put at risk. How much is the board willing to lose from any one event, whether it be a single credit event or any type of event?” He later pushed for specificity—“a quarter’s worth of earnings … some percentage of capital … or some absolute dollar amount.”
Assume concentrations can overwhelm even “good” credit disciplines. Lentino’s blunt reminder: “No matter how good the underwriting of your firm is, no matter how good your ongoing monitoring is, no matter how good your loan review is, the fact is that concentrations kill.” The practical implication is that portfolio construction and limits governance can’t be treated as a back-office compliance exercise—they’re core risk survival skills.
Make data quality the prerequisite, not the afterthought. Walter Galloway, director of credit analytics and strategy at Comerica, tied workable limits to usable information: “Making concentration limits workable depends on reliable data. You can’t understand, assess, and react to your own balance-sheet dynamics if you don’t have clean, reliable, accessible data.” His bottom line: “Data availability, in fact, data quality, is top of my list.”
Use more tools than just “say no” underwriting. Mary Young, senior vice president and head of credit portfolio management at Regions Bank, pointed to risk-transfer and balance-sheet options that she thinks are underused: insurance, synthetic securitization, and private credit partnerships. “For regional banks in the U.S., the biggest action may be to explore those tools,” she said.
Keep limits dynamic—and be ready to move off-cycle. Young described limits as a signaling mechanism: “Our limits are dynamic month to month throughout the year … enough to send a risk signal to the line that something has changed.” Lentino reinforced the need to adjust between annual refreshes: “The environment changes, things shift, and you’ve just got to be prepared to move on an interim basis.” The speed of risk also keeps accelerating. Lentino pointed to deposit runs as a reminder that timelines have compressed—in the financial crisis Wachovia and Washington Mutual lost “about 10% of their deposits over a two-week period,” he said. In 2023, Silicon Valley Bank lost “40% of their deposits within 48 hours.”
The bottom line: stress testing. Lentino put it this way: “Stress testing, stress testing, and stress testing, which gives your organization the best chance to better identify, measure, monitor, manage, and report potential concentrations.”
