INVESTIGATING THE RELATIONSHIP BETWEEN THE SINGLE-NAME CONCENTRATION RISK AND CAPITAL SURPLUS: EVIDENCE FROM THE MACEDONIAN BANKING SECTOR
INVESTIGATING THE RELATIONSHIP BETWEEN THE SINGLE-NAME CONCENTRATION RISK AND CAPITAL SURPLUS: EVIDENCE FROM THE MACEDONIAN BANKING SECTOR

Summary/Abstract: Banks lend large funds to big clients and are exposed to concentration risk. The concentration risk is indirect credit risk exposure for the banks and it might cause large losses in case of default of the big clients. Therefore, prudent banks would in - crease their capital surplus as the concentration exposure rises in order to preserve their stability against deteriorating performances of the big clients. Thus, this paper investigates the effect of the single-name concentration risk on the capital surplus in the Macedonian banking sector. The analysis was done by employing Vector Error Correction Model on quarterly data from 2006q1 to 2018q4. The results suggest that the Macedonian banking sector is prudent and increases the capital surplus from 0.65 percentage points (p.p.) to 2.20 p.p., as the single-name concentration risk rises by 1 p.p. More concretely, a future increase of the banking sectors’ large exposures by 53.7 million of euros (1 p.p. of the total gross loans as of 2018q4), would require an increase of the capital surplus by the minimum amount of 3.1 million of euros (0.65 p.p. of the minimum capital requirement as of 2018q4), under the assumption of not changing both the total gross loans and the minimum capital requirement, compared to 2018q4.

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