What is Herfindahl-Hirschman Index (HHI)?
The Herfindahl-Hirschman Index measures concentration by summing the squares of each segment's share of the total. For a loan portfolio, segments might be geographic (by state), by loan type, by vintage, or by borrower. HHI ranges from near 0 (perfectly diversified) to 10,000 (completely concentrated in one segment). An HHI below 1,500 indicates low concentration; 1,500-2,500 is moderate; above 2,500 is high concentration. Regulators use HHI to evaluate portfolio risk; concentrated portfolios are more vulnerable to sector-specific shocks.
Formula
HHI = Σ(share_i × 100)² Where share_i is the fraction of total balance in segment i Example: 3 equal segments = (33.3)² × 3 = 3,333
How LoanBook Uses Herfindahl-Hirschman Index
LoanBook calculates HHI across multiple dimensions (state, loan type, vintage, FICO band) in the Portfolio Intelligence Report. High HHI triggers concentration warnings that map to NCUA examination criteria. The concentration analysis tab visualizes HHI by sector and geography.
Frequently Asked Questions
What is a good HHI for a loan portfolio?
Below 1,500 is generally considered well-diversified. Credit union examiners start paying attention around 2,000-2,500, especially for participation portfolios concentrated with a single originator or sector.
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