CREDIT RISK AND SECTORAL CONCENTRATION RELATIONSHIP

Abstract

The essential principle of risk management is portfolio diversification. Within the framework of portfolio theory, the commercial banks have to optimally distribute the credit risk to the loan portfolio of customers. Therefore, the concentration risk is one of the main reasons which could be cause to expose the loans of a bank to loss. The aim of this paper is to analyze the effect of diversification by sector on the credit risk of loans that the commercial banks lend in Turkey. It is used as a measure of concentration of loans? portfolio which is called The Herfindahl-Hirschman Index (HHI) and it is analyzed that the annual data over the years 2002-2018 based on the method of panel VAR. It is also examined that the effect of some other determinants on the nonperforming loans in the study. According to the results obtained, it is determined that there is two-way causality between the level of sectoral concentration of loans and the the credit risk.