Concentration in lending: commercial vs financial credits Lucia Gibilaro Lecturer of Economics and Management of Financial Intermediaries University of Bergamo – Faculty of Economics and Gianluca Mattarocci Lecturer of Economics and Management of Financial Intermediaries University of Rome “Tor Vergata” – Faculty of Economics

Research questions Which are approaches allowed to measure concentration risk? Could differences among commercial and financial credits impact on concentration measures? Looking at Italian market, are there differences on concentration estimates for different types of financial instruments on the basis of criterion adopted?

Structure Introduction Single name concentration vs sectoral / geographical concentration The characteristics of financial and commercial credits Evidence from the Italian market Final remarks

Introduction Pillar I “… limits are established on the basis of the risk exposure and of the amount of lending offered to each counterparty …” (Bank of Italy, 2006) Pillar II “ To define the amount of economic capital, Banks and financial groups estimate or evaluate all risk exposures using methodologies that fit the best…” (Bank of Italy, 2006)

Structure Introduction Single name concentration vs sectoral / geographical concentration The characteristics of financial and commercial credits Evidence from the Italian market Final remarks

Single name vs sectoral / geographical concentration (1/2) Single name concentration considers non- systematic risk linked to specific characteristics of counterparties The relevance of this type of risk could be explained by: the collusion risk; the risk of illiquidity of assets.

Single name vs sectoral / geographical concentration (2/2) The impact of macroeconomic dynamics on each counterparty is influenced by the characteristic of the context where the enterprise works (sector and / or geographical area) Diversification on the basis of geographical and sectoral aspects allow to reduce the overall risk of lending portfolio but too much diversification implies an high level of screening and monitoring costs

Structure Introduction Single name concentration vs sectoral / geographical concentration The characteristics of financial and commercial credits Evidence from the Italian market Final remarks

The characteristics of financial and commercial credits (1/2) Financial credits Financial determinants -Rating -Assets -Guarantees -etc… Commercial credits Financial determinants + Real determinants -Guarantee of product quality -Price discrimination tool -Enhancement of customers loyalty -etc…

The characteristics of financial and commercial credits (2/2) The single name approach fits the best to estimate the concentration risk for commercial credits if the role of financial determinants prevails Some empirical evidences demonstrate that commercial credits are more single name concentrated respect to financial ones If there is a difference in single name concentration, it must be considered a signal of higher risk of these types of lending or it is only related to the contract characteristics

Structure Introduction Single name concentration vs sectoral / geographical concentration The characteristics of financial and commercial credits Evidence from the Italian market Final remarks

Evidence from the Italian market (1/7) Sample Financial Credits Official statistics Source: Bank of Italy data Commercial Credits Factoring as a proxy of commercial credits Source: Assifact data Time horizon: 2003 – 2006 Frequency of data collected: quarterly Type of data collected: - Amount of overall credit classified for sector and geographical region - Exposure to Top customers - Default

Evidence from the Italian market (2/7) Methodology Single name concentration Sectoral / geographical concentration Gini indexEntropy index Relative distance index

Evidence from the Italian market (3/7) Mean CR Range CR Factoring companies 12.40%26.57% % Banks7.01%8.33% % Single name concentration Biggest banks12.19%14.37% % Big banks10.65%12.33% % Medium banks11.22%12.52% % Small banks9.52%10.56% % Smallest banks6.01%7.12% %

Evidence from the Italian market (4/7) Statistics Counterpart evaluated Overall Transferor Pro-solvendo Debtor Pro- soluto Number of defaults for big exposures respect total number Mean2.34%0.12%3.75%0.86% Range0.00% %0.00% %0.01% %0.00% % Amount of defaults related to big exposures respect to overall defaults Mean3.69%1.23%3.15%1.31% Range1.00% %1.00% %1.00% %1.00% – 2.00% Defaults and single name concentration

Evidence from the Italian market (5/7) Gini IndexEntropy index MeanRangeMeanRange Financial creditsOverall 68.18%69.41% %74.62%73.56% % Commercial credits Overall 71.04%71.91% – 70.36%72.55%41.41% % Pro-soluto 66.01%64.78% %72.59%43.70% Pro-solvendo 77.33%76.15% %76.96%71.48% % Relative distance index for commercial credit respect to financial credits MeanRange Regions with higher and lower differences Overall 36.26%0.05% %Lazio – Molise Pro-soluto 24.05%0.10% %Toscana – Molise Pro-solvendo 24.62%0.04% %Lombardia – Molise Geographical concentration

Evidence from the Italian market (6/7) Gini IndexEntropy index MeanRangeMeanRange Financial creditsOverall 45.91%50.15% %86.36%89.37% – 82.73% Commercial credits Overall 53.22%59.04% %68.36%69.09% % Pro-soluto 53.64%57.87% %72.89%73.82%-72.15% Pro-solvendo 56.43%63.24% %62.69%63.08% % Relative distance index for commercial credit respect to financial credits MeanRange Sectors with higher and lower differences Overall 44.55%0.18% % Accommodation and public service – Metals and Minerals Pro-soluto 43.11%0.32% % Accommodation and public service – Chemical Manufacturing Pro-solvendo 42.21%0.09% % Accommodation and public service – Other industrial products Sectoral concentration

Evidence from the Italian market (7/7) Defaults and sectoral / geographical concentration for commercial credits Coherence between starting exposure and defaults for each category Coherence between starting exposure and defaults for group of categories MediaMaxMinMediaMaxMin Sectoral classification13.16%26.32%5.26%92.54%94.74%78.85% Geographical classification9.21%21.05%0.00%50.00%63.16%36.84%

Structure Introduction Single name concentration vs sectoral / geographical concentration The characteristics of financial and commercial credits Evidence from the Italian market Final remarks

Commercial credits are structurally more concentrated respect to financial ones Higher level of single name concentration for commercial credits does not impact on the riskiness of lendings Geographical and sectoral concentration in commercial credits are better proxies for the riskiness of counterparties’ portfolios

Thanks for your attention Contact information: Gianluca Mattarocci Tel