SYSTEMIC RISK AND PORTFOLIO DIVERSIFICATION
The degree of systemic and concentration among the counterparties together with the corresponding degree of the corresponding credit exposures define portfolio diversification. Portfolios should be adjusted by considering both systemic and concentration risks.
High systemic correlation and exposure or counterparty concentration indicates high risk losses and vice- versa. An optimal portfolio should be balanced based on the systemic and concentration parameters as indicated in this chapter. This is important for loans provided by marketplace lending platforms because they have a tendency to concentrate exposure narrowly. At the same time, they are seemingly allocated across many investors, which might lead regulators to underestimate exposure by one single counterparty. The potential for a large exposure by a single entity exists, especially in light of an uptrend in securitizations of marketplace loans. At the same time, analytics of the asset class in aggregate are lagging behind, which might mask these issues.Both systemic and concentration risk analysis is based on integrated market, counterparty credit and behavior risk. A diversified portfolio can minimize these risks by applying a contract-based and integrated risk management approach.
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