Lesson 13 of 25 · 7 min
Why a concentrated holder resists the word concentrated
To a lender the term is a threshold with arithmetic attached; to the owner it is a verdict on their judgement.
Concentrated is a classification, not an opinion. A lender defines it numerically — a single issuer above some share of the account — and attaches a consequence to the definition. The word arrives at the borrower carrying a tone it does not have in the document.
The resistance is ordinary and has a name. Identity-protective reasoning is the tendency to evaluate a claim by what accepting it would say about oneself. A holding that has done well is evidence of good judgement; the label concentrated reframes the same holding as an unmanaged exposure. Both descriptions are of the identical share count, and only one of them has a number attached.
Here is the number. An account of $2,480,000 contains $1,612,000 of one issuer, which is 65.0 percent of it. The concentration limit is an illustrative 25 percent, so $2,480,000 × 0.25 = $620,000 sits inside the limit and $1,612,000 − $620,000 = $992,000 sits outside it. The portion within the limit takes the ordinary 60 percent advance rate and the excess takes 20 percent: $620,000 × 0.60 + $992,000 × 0.20 = $372,000 + $198,400 = $570,400.
The effective advance rate on the holding is $570,400 ÷ $1,612,000 = 35.4 percent, against the 60 percent that appears next to the asset class in the schedule. The classification is therefore worth $1,612,000 × 0.60 − $570,400 = $396,800 of capacity. That is what the word means operationally, and the operational meaning contains no assessment of the holder, the holding, or the decision to own it.
The label is a description of what happens to the lender if this one price moves. It is not a description of the person holding it.
Key terms
- Concentration limit
- The share of an account a lender will count at ordinary advance rates for a single issuer. Value above it is discounted more heavily or not counted at all.
- Identity-protective reasoning
- Assessing a claim partly by what accepting it would imply about oneself, rather than only by the evidence for it.
- Effective advance rate
- Lending value divided by market value for a single holding after limits are applied. Often far below the rate printed for the asset class.
Worked example
What the classification costs, in dollars
Account $2,480,000, of which $1,612,000 is one issuer. Illustrative concentration limit 25%. Advance rate 60% within the limit, 20% above it.
- Share of the account in one issuer
- 65.0%
- Value inside the limit
- $620,000
- Value above the limit
- $992,000
- Lending value of the holding
- $570,400
- Effective advance rate
- 35.4%
- Capacity forgone against the schedule rate
- $396,800
$1,612,000 ÷ $2,480,000.
$2,480,000 × 0.25.
$1,612,000 − $620,000.
($620,000 × 0.60) + ($992,000 × 0.20).
$570,400 ÷ $1,612,000.
($1,612,000 × 0.60) − $570,400.
The printed rate is 60 percent and the operative rate is 35.4 percent. The whole of the difference is one word in a policy document.
Check yourself
An account of $2,480,000 holds $1,612,000 of one issuer. The limit is 25 percent, with a 60 percent advance rate inside it and 20 percent above. What is the effective advance rate on the holding?
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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.