1. Most major banking problems have been either explicitly or indirectly caused by weaknesses in credit risk management. In supervisors’ experience, certain key problems tend to recur. Severe credit losses in a banking system usually reflect simultaneous problems in several areas, such as concentrations, failures of due diligence and inadequate monitoring. This appendix summarises some of the most common problems related to the broad areas of concentrations, credit processing, and market- and liquidity-sensitive credit exposures.

Concentrations

2. Concentrations are probably the single most important cause of major credit problems. Credit concentrations are viewed as any exposure where the potential losses are large relative to the bank’s capital, its total assets or, where adequate measures exist, the bank’s overall risk level. Relatively large losses [Losses are equal to the exposure times the percentage loss given the event of default.] may reflect not only large exposures, but also the potential for unusually high percentage losses given default.

3. Credit concentrations can further be grouped roughly into two categories:

• Conventional credit concentrations would include concentrations of credits to single borrowers or counterparties, a group of connected counterparties, and sectors or industries, such as commercial real estate, and oil and gas.