What HHI is too high?
The agencies generally consider markets in which the HHI is between 1,500 and 2,500 points to be moderately concentrated, and consider markets in which the HHI is in excess of 2,500 points to be highly concentrated. See U.S. Department of Justice & FTC, Horizontal Merger Guidelines § 5.3 (2010).
What does a high HHI mean?
Herfindahl-Hirschman Index
Key Takeaways. The Herfindahl-Hirschman Index (HHI) is used to determine market competitiveness. A market with an HHI of less than 1,500 is considered a competitive marketplace, an HHI of 1,500 to 2,500 is moderately concentrated, and an HHI of 2,500 or greater is highly concentrated.
How do you quantify concentration risks?
Concentration risk is usually calculated by comparing the liquidity of assets to their risk exposure. Credit risk: The default of an individual debtor or a group of debtors in the same sector can be ruinous without sufficient diversification.
What does a low HHI mean?
The Herfindahl-Hirschman Index is an index that measures the market concentration of an industry. A low degree of concentration means that the industry is closer to a perfect competition scenario, where many firms of more or less equal size share the market.
Does high HHI always imply poor market performance?
The HHI value can range anywhere from near 0 up to 10,000. A higher index value means that the industry is considered to be closer to monopoly conditions. Generally, a market with an HHI value of under 1,000 is considered to be competitive.
What is the four firm concentration ratio formula?
The four-firm concentration ratio is calculated by adding the market shares of the four largest firms: in this case, 16 + 10 + 8 + 6 = 40. This concentration ratio would not be considered especially high, because the largest four firms have less than half the market.
What is a high concentration ratio?
Concentration ratio indicates the level of competition between firms comprised in an industry. It is the ratio of the size of the firms to the entire industry. A high concentration ratio closer to 100% indicates the existence of a monopoly in an industry or lack of competition to such firms.
What is the 4 firm concentration ratio?
The four-firm concentration ratio, which consists of the market share of the four largest firms in an industry, expressed as a percentage, is a commonly used concentration ratio. The three-firm and five-firm are two more concentration ratios that can be used.
What is asset concentration risk?
Asset concentration risk, when investors rely too much on a single investment or portfolio of different kinds of securities and asset classes. According to the Financial Industry Regulatory Authority (FINRA), “Mutual funds and exchange-traded funds (ETFs) can be helpful in achieving broad diversification.”
What is loan concentration risk?
Loan concentration risk refers to the extra risk borne by having too many loans concentrated with one firm, industry, or economic sector. To the extent that a portfolio of loans represents loans made to a diverse cross section of the economy, concentration risk is minimized.
How do you interpret Herfindahl index?
Increases in the Herfindahl index generally indicate a decrease in competition and an increase of market power, whereas decreases indicate the opposite. Alternatively, if whole percentages are used, the index ranges from 0 to 10,000 “points”. For example, an index of . 25 is the same as 2,500 points.
What is the four firm concentration ratio?
How are credit concentration risk and the HHI related?
Some firms calculate the HHI impact on a deal by deal basis and add/allocate capital accordingly. Having internal concentration risk limits aligned to the firm’s risk appetite in addition to the HHI limits/metrics. This would, for example, include additional regions and sectors in line with the institution’s overall risk profile.
What is the Herfindahl-Hirschman Index ( HHI )?
The Herfindahl-Hirschman Index (HHI) is a measure of market concentration in an industry. It measures the market concentration of the 50 largest companies in a particular industry to determine if that industry should be considered competitive or as close to being a monopoly.
How big is the HHI requirement in the UK?
This issue is amplified for small UK focused banks where the UK concentration risk HHI requirement is the most significant add-on (normally 1.33 per cent of the relevant credit RWAs). How do firms manage concentration risk?
How is the concentration ratio ( HHI ) calculated?
The HHI is calculated by taking the market share of each firm in the industry, squaring them, and summing the result, as depicted in the equation above. Consider the following hypothetical industry with four total firms: Firm one market share = 40%. Firm two market share = 30%.