Concentration Risk Rarely Looks Like Concentration
A portfolio can appear diversified by borrower, industry, or geography while remaining highly exposed to the same underlying assumptions.
Source note: Originally published by Wayne Trotman on LinkedIn in 2026. This TCA edition has been expanded for institutional readers while preserving the original thesis and key points. View original LinkedIn post ↗
Visible concentration is only part of the problem
Traditional concentration analysis focuses on sector limits, single name exposure, and geographic distribution. Those measures remain important, but they do not capture every way in which risks can become connected.
Individually reasonable decisions can share the same dependency
Different borrowers can depend on the same end market. Different industries can be exposed to the same input cost. Multiple transactions can rely on the same refinancing market, interest rate environment, liquidity conditions, consumer demand cycle, or exit assumptions.
Diversification can therefore be superficial
On paper, the exposures may look distinct. Under stress, the shared assumptions become visible and the portfolio begins to move together. The risk was present before the stress. The stress simply revealed the correlation.
The portfolio question is about shared risk drivers
Strong institutions look beyond the number of exposures and ask which assumptions connect them. That means mapping common dependencies across industries, structures, sponsors, collateral markets, and funding environments.
Correlation becomes visible when conditions change
Concentration risk is not only about size. It is also about the degree to which apparently independent credits can respond to the same shock. Portfolio governance should therefore test not only where exposure sits, but which underlying drivers could cause multiple exposures to weaken at the same time.
Diversification is not simply the number of exposures. It is the independence of the underlying risk drivers.