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Name concentration risk in Multilateral Development Banks’ portfolios: Measurement and capital adequacy implications

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  • Lütkebohmert, Eva
  • Sester, Julian
  • Shen, Hongyi

Abstract

Sovereign loan portfolios of Multilateral Development Banks (MDBs) typically comprise a small number of borrowers, making them particularly exposed to single name concentration (SNC) risk. Using realistic MDB portfolios constructed from publicly available data, this paper quantifies SNC risk through accurate Monte Carlo simulations. We find that SNC risk can account for up to 82% of total unexpected loss in MDB sovereign loan portfolios. Comparing the exact adjustment for SNC risk with its analytical approximation currently applied by a major rating agency, we show that the approximation can overestimate SNC risk by up to 266%. This overestimation has implications for the assessment of MDB capital adequacy, potentially limiting MDB lending capacity. Our results suggest that adopting a more accurate assessment of SNC risk could increase lending capacity by approximately 5% without affecting risk-weighted capital ratios. These findings highlight the importance of refining capital adequacy methodologies to better reflect the unique risk profiles of MDBs and unlock additional lending headroom for global development.

Suggested Citation

  • Lütkebohmert, Eva & Sester, Julian & Shen, Hongyi, 2025. "Name concentration risk in Multilateral Development Banks’ portfolios: Measurement and capital adequacy implications," Global Finance Journal, Elsevier, vol. 67(C).
    • Handle: RePEc:eee:glofin:v:67:y:2025:i:c:s104402832500081x
    DOI: 10.1016/j.gfj.2025.101154
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    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics

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