Geographic Diversification
How we measure and enforce regional, state, and MSA concentration to reduce correlated losses.
What This Means for You
Don't put too many eggs in one basket. We show you exactly where your portfolio is over-concentrated—by region, state, or metro—and recommend caps so one disaster doesn't wipe out multiple loans at once.
How It Works
Compute concentration at three levels: Region, State, MSA using portfolio exposure shares.
Score diversification as 1 - weighted concentration using Herfindahl-Hirschman-like index.
Apply caps: <15% Region, <25% State, <10% MSA (tunable by risk appetite).
Key Capabilities
When You'll See Results
Rebalance in 3–12 months; review monthly; enforce caps quarterly.
Technical Details
Formulas
Concentration Ratio = Portfolio Exposure in Region/State/MSA / Total Portfolio Exposure
Herfindahl-Hirschman Index (HHI) = Σ(Exposure Share²) where shares are squared percentages
Diversification Score = 1 - (Weighted HHI) where weights are: Region 40%, State 35%, MSA 25%
Expected Tail Loss Reduction = Baseline Tail Loss × (1 - Diversification Score Improvement)
Capital Relief = Stress Loss Reduction × Regulatory Capital Multiplier (typically 8-12.5%)
Example
Bank has 25% exposure in Los Angeles County (high disaster risk)
Current MSA Concentration
25% (exceeds 10% cap)
HHI = 0.25²
0.0625 (high concentration risk)
Recommended Action: Reduce to 10% cap
15 percentage point reduction
Expected Loss Reduction: 15% × $500M portfolio × 5% disaster default rate × 36.6% LGD
$1.37M protected
Capital Relief: $1.37M stress loss reduction × 10% capital multiplier
$137K capital freed
Ready to Get Started?
Upload your portfolio or schedule a demo to see Geographic Diversification in action.