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

Eva Lütkebohmert, Julian Sester and Hongyi Shen

Global Finance Journal, 2025, vol. 67, issue C

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.

Keywords: Capital adequacy; Loan portfolios; Single name concentration risk; Multilateral development banks (search for similar items in EconPapers)
JEL-codes: C45 G15 G24 G32 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:glofin:v:67:y:2025:i:c:s104402832500081x

DOI: 10.1016/j.gfj.2025.101154

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