In Example 11–1, what would the concentration limit be if the loss rate on bad loans is 25 cents on the dollar? (60 percent)

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EXAMPLE 11-1 Calculating Concentration Limits for a Loan Portfolio Suppose management is unwilling to permit losses exceeding 15 percent of an Fl's capital to a particular sector. If management estimates that the amount lost per dollar of defaulted loans in this sector is 40 cents, the maximum loans to a single sector as a percent of capital, defined as the concentration limit, is: Concentration limit = Maximum loss as a percent of capital x 1 Loss rate = 15% x (1/0.4) = 37.5%