Why account-level scores are not enough
A portfolio can contain many accounts that depend on the same employer, industry, region, or economic conditions. Their outcomes may deteriorate together. A simple average risk score can hide this concentration.
Hypothetical example: A supplier serves 100 customers, but 60% of receivables relate to businesses dependent on one construction project. The customer count alone does not show how concentrated the exposure is.
Relevant risk dimensions
Credit risk concerns nonpayment and loss severity. Concentration concerns dependence on particular borrowers or common factors. Liquidity concerns the timing or availability of funds. Market and interest-rate risks can also matter for some assets.
Operational errors, disputed balances, and unreliable data can distort the assessment.
Review the whole portfolio
Use consistent balances and dates. Examine exposure by customer group, sector, geography, age, collateral, and other relevant factors. Consider adverse scenarios alongside expected outcomes.
Diversification may reduce some concentration but cannot eliminate every risk or guarantee a lower loss.
Use results appropriately
Risk analysis can inform approved limits, monitoring, forecasts, and collection priorities. It does not establish legal collectibility, current affordability, or permission for an enforcement action.
Document model assumptions and limitations. Avoid unsupported accuracy claims or universal loss-reduction benchmarks.
Reference: OCC guidance on credit concentrations.