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</style><table class="sidebar nomobile nowraplinks" style="border:1px solid #B2BEB5"><tbody><tr><td class="sidebar-pretitle" style="background:#ACE1AF">Categories of</td></tr><tr><th class="sidebar-title-with-pretitle" style="background:#ACE1AF;padding-bottom:0.15em;"><a href="Financial_risk" title="Financial risk">Financial risk</a></th></tr><tr><td class="sidebar-image"><span typeof="mw:File"></span></td></tr><tr><th class="sidebar-heading" style="background:#ACE1AF">
</th></tr><tr><td class="sidebar-content plainlist">
<ul><li><a href="Settlement_risk" title="Settlement risk">Settlement risk</a></li>
<li><a href="Concentration_risk" title="Concentration risk">Concentration risk</a></li>
<li><a href="Sovereign_credit_risk" title="Sovereign credit risk">Sovereign risk</a></li>
<li><a href="Default_(finance)" title="Default (finance)">Default risk</a></li></ul></td>
</tr><tr><th class="sidebar-heading" style="background:#ACE1AF">
<a href="Market_risk" title="Market risk">Market risk</a></th></tr><tr><td class="sidebar-content plainlist">
<ul><li><a href="Interest_rate_risk" title="Interest rate risk">Interest rate risk</a></li>
<li><a href="Inflation_risk" class="mw-redirect" title="Inflation risk">Inflation risk</a></li>
<li><a href="Currency_risk" class="mw-redirect" title="Currency risk">Currency risk</a></li>
<li><a href="Equity_risk" title="Equity risk">Equity risk</a></li>
<li><a href="Commodity_risk" title="Commodity risk">Commodity risk</a></li>
<li><a href="Volatility_risk" title="Volatility risk">Volatility risk</a></li>
<li><a href="Systemic_risk" title="Systemic risk">Systemic risk</a></li>
<li><a href="Systematic_risk" title="Systematic risk">Systematic risk</a></li></ul></td>
</tr><tr><th class="sidebar-heading" style="background:#ACE1AF">
<a href="Liquidity_risk" title="Liquidity risk">Liquidity risk</a></th></tr><tr><td class="sidebar-content plainlist">
<ul><li><a href="Refinancing_risk" title="Refinancing risk">Refinancing risk</a></li>
<li><a href="Deposit_risk" title="Deposit risk">Deposit risk</a></li>
<li><a href="Margining_risk" title="Margining risk">Margining risk</a></li></ul></td>
</tr><tr><th class="sidebar-heading" style="background:#ACE1AF">
<a href="Investment_risk" class="mw-redirect" title="Investment risk">Investment risk</a></th></tr><tr><td class="sidebar-content plainlist">
<ul><li><a href="Model_risk" title="Model risk">Model risk</a></li>
<li><a href="Execution_risk" class="mw-redirect" title="Execution risk">Execution risk</a></li>
<li><a href="Valuation_risk" title="Valuation risk">Valuation risk</a></li></ul></td>
</tr><tr><th class="sidebar-heading" style="background:#ACE1AF">
<a href="Business_risk" class="mw-redirect" title="Business risk">Business risk</a></th></tr><tr><td class="sidebar-content plainlist">
<ul><li><a href="Reputational_risk" class="mw-redirect" title="Reputational risk">Reputational risk</a></li>
<li><a href="Operational_risk" title="Operational risk">Operational risk</a></li>
<li><a href="Country_risk" title="Country risk">Country risk</a></li>
<li><a href="Political_risk" title="Political risk">Political risk</a></li>
<li><a href="Legal_risk" title="Legal risk">Legal risk</a></li>
<li><a href="Moral_hazard" title="Moral hazard">Moral hazard</a></li></ul></td>
</tr><tr><th class="sidebar-heading" style="background:#ACE1AF">
<a href="Profit_risk" title="Profit risk">Profit risk</a></th></tr><tr><th class="sidebar-heading" style="background:#ACE1AF">
<a href="Non-financial_risk" title="Non-financial risk">Non-financial risk</a></th></tr><tr><td class="sidebar-content plainlist">
<ul><li><a href="Stranded_asset" title="Stranded asset">Stranded asset</a></li></ul></td>
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<table class="sidebar nomobile nowraplinks hlist"><tbody><tr><th class="sidebar-title" style="background: silver">Basel Framework <br><small>International regulatory standards for banks</small></th></tr><tr><td class="sidebar-content">
<ul><li><a href="Basel_Committee_on_Banking_Supervision" title="Basel Committee on Banking Supervision">Basel Committee on Banking Supervision</a></li>
<li><a href="Basel_Accords" title="Basel Accords">Basel Accords</a>
<ul><li><a href="Basel_I" title="Basel I">Basel I</a></li>
<li><a href="Basel_II" title="Basel II">Basel II</a></li>
<li><a href="Basel_III" title="Basel III">Basel III</a>
<ul><li><a href="Liquidity_coverage_ratio" class="mw-redirect" title="Liquidity coverage ratio">LCR</a></li>
<li><a href="Net_stable_funding_ratio" title="Net stable funding ratio">NSFR</a></li>
<li><a href="Fundamental_Review_of_the_Trading_Book" title="Fundamental Review of the Trading Book">FRTB</a></li>
<li><a href="Basel_III%3A_Finalising_post-crisis_reforms" title="Basel III: Finalising post-crisis reforms">Final BIII Reforms</a></li></ul></li></ul></li></ul></td>
</tr><tr><th class="sidebar-heading" style="font-weight: normal; background: silver; padding-bottom: 0.3em;">
Background</th></tr><tr><td class="sidebar-content">
<ul><li><a href="Banking" class="mw-redirect" title="Banking">Banking</a> / <a href="Bank_regulation" class="mw-redirect" title="Bank regulation">Regulation</a></li>
<li><a href="Monetary_policy" title="Monetary policy">Monetary policy</a> / <a href="Central_bank" title="Central bank">Central bank</a></li>
<li><a href="Risk" title="Risk">Risk</a> / <a href="Risk_management" title="Risk management">Risk management</a></li></ul></td>
</tr><tr><th class="sidebar-heading" style="font-weight: normal; background: silver; padding-bottom: 0.3em;">
Pillar 1: Regulatory capital</th></tr><tr><td class="sidebar-content">
<ul><li><a href="Capital_requirement" title="Capital requirement">Capital requirement</a>
<ul><li><a href="Capital_adequacy_ratio" title="Capital adequacy ratio">Capital ratio</a></li>
<li><a href="Basel_III#Leverage_ratio" title="Basel III">Leverage ratio</a></li>
<li><a href="Tier_1_capital" title="Tier 1 capital">Tier 1</a></li>
<li><a href="Tier_2_capital" title="Tier 2 capital">Tier 2</a></li></ul></li>
<li>
<ul><li><a href="Standardized_approach_(credit_risk)" title="Standardized approach (credit risk)">SA-CR</a></li>
<li><a href="Internal_ratings-based_approach_(credit_risk)" title="Internal ratings-based approach (credit risk)">IRB</a>
<ul><li><a href="Foundation_IRB" title="Foundation IRB">F-IRB</a></li>
<li><a href="Advanced_IRB" title="Advanced IRB">A-IRB</a></li></ul></li>
<li><a href="Exposure_at_default" title="Exposure at default">EAD</a>
<ul><li><a href="Standardized_approach_(counterparty_credit_risk)" title="Standardized approach (counterparty credit risk)">SA-CCR</a></li>
<li>IMM</li></ul></li>
<li><a href="Credit_conversion_factor" title="Credit conversion factor">CCF</a></li></ul></li>
<li><a href="Market_risk" title="Market risk">Market risk</a>
<ul><li><a href="Standardized_approach_(market_risk)" class="mw-redirect" title="Standardized approach (market risk)">Standardized</a></li>
<li><a href="Internal_models_approach_(market_risk)" class="mw-redirect" title="Internal models approach (market risk)">IMA</a></li></ul></li>
<li><a href="Credit_valuation_adjustment" title="Credit valuation adjustment">CVA vol</a>
<ul><li><a href="XVA#Accounting_impact" title="XVA">BA-CVA</a></li>
<li><a href="XVA#Accounting_impact" title="XVA">SA-CVA</a></li></ul></li>
<li><a href="Operational_risk" title="Operational risk">Operational risk</a>
<ul><li><a href="Basic_indicator_approach" title="Basic indicator approach">Basic</a></li>
<li><a href="Standardized_approach_(operational_risk)" title="Standardized approach (operational risk)">Standardized</a></li>
<li><a href="Advanced_measurement_approach" title="Advanced measurement approach">AMA</a></li></ul></li></ul></td>
</tr><tr><th class="sidebar-heading" style="font-weight: normal; background: silver; padding-bottom: 0.3em;">
Pillar 2: Supervisory review</th></tr><tr><td class="sidebar-content">
<ul><li><a href="Economic_capital" title="Economic capital">Economic capital</a></li>
<li><a href="Liquidity_risk" title="Liquidity risk">Liquidity risk</a></li>
<li><a href="Legal_risk" title="Legal risk">Legal risk</a></li></ul></td>
</tr><tr><th class="sidebar-heading" style="font-weight: normal; background: silver; padding-bottom: 0.3em;">
Pillar 3: Market disclosure</th></tr><tr><td class="sidebar-content">
<ul><li><a href="Corporation#Financial_disclosure" title="Corporation">Disclosure</a></li></ul></td>
</tr><tr><td class="sidebar-below" style="font-weight: normal; background: silver">
<a href="Portal%3ABusiness_and_economics" class="mw-redirect" title="Portal:Business and economics">Business and Economics Portal</a></td></tr><tr><td class="sidebar-navbar"></td></tr></tbody></table>
<p><b>Credit risk</b> is the chance that a <a href="Borrower" class="mw-redirect" title="Borrower">borrower</a> does not repay a <a href="Loan" title="Loan">loan</a> or fulfill a loan obligation.<sup id="cite_ref-bcbs_1-0" class="reference"><a href="#cite_note-bcbs-1"><span class="cite-bracket">[</span>1<span class="cite-bracket">]</span></a></sup> For <a href="Lenders" class="mw-redirect" title="Lenders">lenders</a> the risk includes late or lost <a href="Interest" title="Interest">interest</a> and <a href="Principal_sum" class="mw-redirect" title="Principal sum">principal</a> payment, leading to disrupted <a href="Cash_flow" title="Cash flow">cash flows</a> and increased <a href="Collection_cost" title="Collection cost">collection costs</a>. The loss may be complete or partial. In an <a href="Efficient-market_hypothesis" title="Efficient-market hypothesis">efficient market</a>, higher levels of credit <a href="Risk" title="Risk">risk</a> will be associated with higher borrowing costs. Because of this, measures of borrowing costs such as <a href="Yield_spread" title="Yield spread">yield spreads</a> can be used to infer credit risk levels based on assessments by <a href="Market_participant" title="Market participant">market participants</a>.
</p><p>Losses can arise in a number of circumstances,<sup id="cite_ref-2" class="reference"><a href="#cite_note-2"><span class="cite-bracket">[</span>2<span class="cite-bracket">]</span></a></sup> for example:
</p>
<ul><li>A consumer may fail to make a payment due on a <a href="Mortgage_loan" class="mw-redirect" title="Mortgage loan">mortgage loan</a>, credit card, <a href="Line_of_credit" title="Line of credit">line of credit</a>, or other loan.</li>
<li>A company is unable to repay asset-secured fixed or <a href="Floating_charge" title="Floating charge">floating charge</a> debt.</li>
<li>A business or consumer does not pay a <a href="Trade_credit" title="Trade credit">trade invoice</a> when due.</li>
<li>A business does not pay an employee's earned wages when due.</li>
<li>A business or government <a href="Bond_(finance)" title="Bond (finance)">bond</a> issuer does not make a payment on a <a href="Coupon_(bond)" class="mw-redirect" title="Coupon (bond)">coupon</a> or principal payment when due.</li>
<li>An <a href="Insolvency" title="Insolvency">insolvent</a> insurance company does not pay a <a href="Insurance_policy" title="Insurance policy">policy</a> obligation.</li>
<li>An insolvent bank will not return funds to a depositor.</li>
<li>A government grants <a href="Bankruptcy" title="Bankruptcy">bankruptcy</a> protection to an insolvent consumer or business.</li></ul>
<p>To reduce the lender's credit risk, the lender may perform a <a href="Credit_check" class="mw-redirect" title="Credit check">credit check</a> on the prospective borrower, may require the borrower to take out appropriate insurance, such as <a href="Mortgage_insurance" title="Mortgage insurance">mortgage insurance</a>, or seek <a href="Collateral_(finance)" title="Collateral (finance)">security</a> over some assets of the borrower or a <a href="Guarantee" title="Guarantee">guarantee</a> from a third party. The lender can also take out insurance against the risk or on-sell the debt to another company. In general, the higher the risk, the higher will be the <a href="Interest_rate" title="Interest rate">interest rate</a> that the debtor will be asked to pay on the debt. Credit risk mainly arises when borrowers are unable or unwilling to pay.
</p>
<meta property="mw:PageProp/toc">
<div class="mw-heading mw-heading2"><h2 id="Types">Types</h2></div>
<p>A credit risk can be of the following types:<sup id="cite_ref-3" class="reference"><a href="#cite_note-3"><span class="cite-bracket">[</span>3<span class="cite-bracket">]</span></a></sup>
</p>
<ul><li><a rel="nofollow" class="external text" href="https://www.investopedia.com/terms/d/defaultrisk.asp#:~:text=Default%20risk%20is%20the%20risk,all%20forms%20of%20credit%20extensions.">Credit default risk</a> – The risk of loss arising from a debtor being unlikely to pay its loan obligations in full or the debtor is more than 90 days past due on any material credit obligation; default risk may impact all credit-sensitive transactions, including loans, securities and <a href="Derivative_(finance)" title="Derivative (finance)">derivatives</a>.</li>
<li><a href="Concentration_risk" title="Concentration risk">Concentration risk</a> – The risk associated with any single exposure or group of exposures with the potential to produce large enough losses to threaten a bank's core operations. It may arise in the form of single-name concentration or industry concentration.</li>
<li><a href="Country_risk" title="Country risk">Country risk</a> – The risk of loss arising from a sovereign state freezing foreign currency payments (transfer/conversion risk) or when it defaults on its obligations (<a href="Sovereign_credit_risk" title="Sovereign credit risk">sovereign risk</a>); this type of risk is prominently associated with the country's macroeconomic performance and its political stability.</li></ul>
<div class="mw-heading mw-heading2"><h2 id="Assessment">Assessment</h2></div>
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</style><div role="note" class="hatnote navigation-not-searchable">Main articles: <a href="Credit_analysis" title="Credit analysis">Credit analysis</a> and <a href="Consumer_credit_risk" title="Consumer credit risk">Consumer credit risk</a></div>
<p>Significant resources and sophisticated programs are used to analyze and manage risk.<sup id="cite_ref-4" class="reference"><a href="#cite_note-4"><span class="cite-bracket">[</span>4<span class="cite-bracket">]</span></a></sup> Some companies run a credit risk department whose job is to assess the financial health of their customers, and extend credit (or not) accordingly. They may use in-house programs to advise on avoiding, reducing and transferring risk. They also use the third party provided intelligence. Nationally recognized statistical rating organizations provide such information for a fee.
</p><p>For large companies with liquidly traded <a href="Corporate_bond" title="Corporate bond">corporate bonds</a> or <a href="Credit_default_swap" title="Credit default swap">Credit Default Swaps</a>, bond <a href="Yield_spread" title="Yield spread">yield spreads</a> and credit default swap spreads indicate market participants assessments of credit risk and may be used as a reference point to price loans or trigger collateral calls.
</p><p>Most lenders employ their models (<a href="Credit_scorecards" title="Credit scorecards">credit scorecards</a>) to rank potential and existing customers according to risk, and then apply appropriate strategies.<sup id="cite_ref-5" class="reference"><a href="#cite_note-5"><span class="cite-bracket">[</span>5<span class="cite-bracket">]</span></a></sup> With products such as unsecured personal loans or mortgages, lenders charge a higher price for higher-risk customers and vice versa.<sup id="cite_ref-6" class="reference"><a href="#cite_note-6"><span class="cite-bracket">[</span>6<span class="cite-bracket">]</span></a></sup><sup id="cite_ref-7" class="reference"><a href="#cite_note-7"><span class="cite-bracket">[</span>7<span class="cite-bracket">]</span></a></sup> With revolving products such as credit cards and overdrafts, the risk is controlled through the setting of credit limits. Some products also require <a href="Collateral_(finance)" title="Collateral (finance)">collateral</a>, usually an asset that is pledged to secure the repayment of the loan.<sup id="cite_ref-8" class="reference"><a href="#cite_note-8"><span class="cite-bracket">[</span>8<span class="cite-bracket">]</span></a></sup>
</p><p>Credit scoring models also form part of the framework used by banks or lending institutions to grant credit to clients.<sup id="cite_ref-JarrowLando1997_9-0" class="reference"><a href="#cite_note-JarrowLando1997-9"><span class="cite-bracket">[</span>9<span class="cite-bracket">]</span></a></sup> For corporate and commercial borrowers, these models generally have qualitative and quantitative sections outlining various aspects of the risk including, but not limited to, operating experience, management expertise, asset quality, and leverage and <a href="Accounting_liquidity" title="Accounting liquidity">liquidity ratios</a>, respectively. Once this information has been fully reviewed by credit officers and credit committees, the lender provides the funds subject to the terms and conditions presented within the contract (as outlined above).<sup id="cite_ref-10" class="reference"><a href="#cite_note-10"><span class="cite-bracket">[</span>10<span class="cite-bracket">]</span></a></sup><sup id="cite_ref-11" class="reference"><a href="#cite_note-11"><span class="cite-bracket">[</span>11<span class="cite-bracket">]</span></a></sup>
</p>
<div class="mw-heading mw-heading3"><h3 id="Sovereign_risk">Sovereign risk</h3></div>
<p><a href="Sovereign_credit_risk" title="Sovereign credit risk">Sovereign credit risk</a> is the risk of a government being unwilling or unable to meet its loan obligations, or reneging on loans it guarantees. Many countries have faced sovereign risk in the <a href="Great_Recession" title="Great Recession">Great Recession</a>. The existence of such risk means that creditors should take a two-stage decision process when deciding to lend to a firm based in a foreign country. Firstly one should consider the sovereign risk quality of the country and then consider the firm's credit quality.<sup id="cite_ref-12" class="reference"><a href="#cite_note-12"><span class="cite-bracket">[</span>12<span class="cite-bracket">]</span></a></sup>
</p><p>Five macroeconomic variables that affect the probability of <a href="Sovereign_debt" class="mw-redirect" title="Sovereign debt">sovereign debt</a> rescheduling are:<sup id="cite_ref-sovrisk_13-0" class="reference"><a href="#cite_note-sovrisk-13"><span class="cite-bracket">[</span>13<span class="cite-bracket">]</span></a></sup>
</p>
<ul><li><a href="Debt_service_ratio" title="Debt service ratio">Debt service ratio</a></li>
<li><a href="Import_ratio" title="Import ratio">Import ratio</a></li>
<li>Investment ratio</li>
<li>Variance of export revenue</li>
<li>Domestic money supply growth</li></ul>
<p>The probability of rescheduling is an increasing function of debt service ratio, import ratio, the variance of export revenue and domestic money supply growth.<sup id="cite_ref-sovrisk_13-1" class="reference"><a href="#cite_note-sovrisk-13"><span class="cite-bracket">[</span>13<span class="cite-bracket">]</span></a></sup> The likelihood of rescheduling is a decreasing function of investment ratio due to future economic productivity gains. Debt rescheduling likelihood can increase if the investment ratio rises as the foreign country could become less dependent on its external creditors and so be less concerned about receiving credit from these countries/investors.<sup id="cite_ref-Saunders_14-0" class="reference"><a href="#cite_note-Saunders-14"><span class="cite-bracket">[</span>14<span class="cite-bracket">]</span></a></sup>
</p>
<div class="mw-heading mw-heading3"><h3 id="Counterparty_risk">Counterparty risk</h3></div>
<p>A counterparty risk, also known as a <a href="Settlement_risk" title="Settlement risk">settlement risk</a> or <b>counterparty credit risk</b> (<b>CCR</b>), is a risk that a <a href="Counterparty" title="Counterparty">counterparty</a> will not pay as obligated on a <a href="Bond_(finance)" title="Bond (finance)">bond</a>, <a href="Derivative_(finance)" title="Derivative (finance)">derivative</a>, <a href="Insurance_policy" title="Insurance policy">insurance policy</a>, or other contract.<sup id="cite_ref-15" class="reference"><a href="#cite_note-15"><span class="cite-bracket">[</span>15<span class="cite-bracket">]</span></a></sup>
Financial institutions or other transaction counterparties may <a href="Hedge_(finance)" title="Hedge (finance)">hedge</a> or take out <a href="Credit_derivative" title="Credit derivative">credit insurance</a> or, particularly in the context of derivatives, require the posting of collateral.
Offsetting counterparty risk is not always possible, e.g. because of temporary liquidity issues or longer-term systemic reasons.<sup id="cite_ref-16" class="reference"><a href="#cite_note-16"><span class="cite-bracket">[</span>16<span class="cite-bracket">]</span></a></sup>
Further, counterparty risk increases due to positively correlated risk factors; accounting for this correlation between portfolio risk factors and counterparty default in risk management methodology is not trivial.<sup id="cite_ref-17" class="reference"><a href="#cite_note-17"><span class="cite-bracket">[</span>17<span class="cite-bracket">]</span></a></sup><sup id="cite_ref-18" class="reference"><a href="#cite_note-18"><span class="cite-bracket">[</span>18<span class="cite-bracket">]</span></a></sup>
</p><p>The <a href="Capital_requirement" title="Capital requirement">capital requirement</a> here is calculated using SA-CCR, the <a href="Standardized_approach_(counterparty_credit_risk)" title="Standardized approach (counterparty credit risk)">standardized approach for counterparty credit risk</a>. This framework replaced both non-internal model approaches – Current Exposure Method (CEM) and Standardised Method (SM).
</p>
<div class="mw-heading mw-heading2"><h2 id="Mitigation">Mitigation</h2></div>
<p>Lenders mitigate credit risk in a number of ways, including:
</p>
<ul><li><b>Risk-based pricing</b> – Lenders may charge a higher <a href="Interest_rate" title="Interest rate">interest rate</a> to borrowers who are more likely to default, a practice called <b><a href="Risk-based_pricing" title="Risk-based pricing">risk-based pricing</a></b>. Lenders consider factors relating to the loan such as <a href="Loan_purpose" title="Loan purpose">loan purpose</a>, <a href="Credit_rating" title="Credit rating">credit rating</a>, and <a href="Loan-to-value_ratio" title="Loan-to-value ratio">loan-to-value ratio</a> and estimates the effect on yield (<a href="Credit_spread_(bond)" class="mw-redirect" title="Credit spread (bond)">credit spread</a>).</li>
<li><b>Covenants</b> – Lenders may write stipulations on the borrower, called <b><a href="Loan_covenant" title="Loan covenant">covenants</a></b>, into loan agreements, such as:<sup id="cite_ref-19" class="reference"><a href="#cite_note-19"><span class="cite-bracket">[</span>19<span class="cite-bracket">]</span></a></sup>
<ul><li>Periodically report its financial condition,</li>
<li>Refrain from paying <a href="Dividend" title="Dividend">dividends</a>, <a href="Share_repurchase" title="Share repurchase">repurchasing shares</a>, borrowing further, or other specific, voluntary actions that negatively affect the company's financial position, and</li>
<li>Repay the loan in full, at the lender's request, in certain events such as changes in the borrower's <a href="Debt-to-equity_ratio" title="Debt-to-equity ratio">debt-to-equity ratio</a> or <a href="Times_interest_earned" title="Times interest earned">interest coverage ratio</a>.</li></ul></li>
<li><b>Credit insurance</b> and <b>credit derivatives</b> – Lenders and <a href="Bond_(finance)" title="Bond (finance)">bond</a> holders may <a href="Hedge_(finance)#Hedging_credit_risk" title="Hedge (finance)">hedge</a> their credit risk by purchasing <b>credit insurance</b> or <b><a href="Credit_derivatives" class="mw-redirect" title="Credit derivatives">credit derivatives</a></b>. These contracts transfer the risk from the lender to the seller (insurer) in exchange for payment. The most common credit derivative is the <b><a href="Credit_default_swap" title="Credit default swap">credit default swap</a></b>.</li>
<li><b>Tightening</b> – Lenders can reduce credit risk by reducing the amount of credit extended, either in total or to certain borrowers. For example, a <a href="Distribution_(business)" class="mw-redirect" title="Distribution (business)">distributor</a> selling its products to a troubled <a href="Retailer" class="mw-redirect" title="Retailer">retailer</a> may attempt to lessen credit risk by reducing payment terms from <i>net 30 </i> to <i>net 15</i>.</li>
<li><b>Diversification</b> – Lenders to a small number of borrowers (or kinds of borrower) face a high degree of <a href="Systematic_risk#Unsystematic_risk" title="Systematic risk">unsystematic</a> credit risk, called <b><a href="Concentration_risk" title="Concentration risk">concentration risk</a></b>.<sup id="cite_ref-20" class="reference"><a href="#cite_note-20"><span class="cite-bracket">[</span>20<span class="cite-bracket">]</span></a></sup> Lenders reduce this risk by <a href="Diversification_(finance)" title="Diversification (finance)">diversifying</a> the borrower pool.</li>
<li><b>Deposit insurance</b> – Governments may establish <b><a href="Deposit_insurance" title="Deposit insurance">deposit insurance</a></b> to guarantee bank deposits in the event of insolvency and to encourage consumers to hold their savings in the banking system instead of in cash.</li></ul>
<div class="mw-heading mw-heading2"><h2 id="Related_initialisms">Related initialisms</h2></div>
<ul><li><b>ACPM</b> Active credit portfolio management <sup id="cite_ref-21" class="reference"><a href="#cite_note-21"><span class="cite-bracket">[</span>21<span class="cite-bracket">]</span></a></sup></li>
<li><b>CCR</b> <a href="Counterparty_credit_risk" class="mw-redirect" title="Counterparty credit risk">Counterparty credit risk</a></li>
<li><b>CE</b> <a href="Credit_exposure" class="mw-redirect" title="Credit exposure">Credit exposure</a></li>
<li><b>CVA</b> <a href="Credit_valuation_adjustment" title="Credit valuation adjustment">Credit valuation adjustment</a></li>
<li><b>DVA</b> Debit valuation adjustment – see <a href="XVA" title="XVA">XVA</a></li>
<li><b>EAD</b> <a href="Exposure_at_default" title="Exposure at default">Exposure at default</a></li>
<li><b>EE</b> <a href="Potential_future_exposure" class="mw-redirect" title="Potential future exposure">Expected exposure</a></li>
<li><b>EL</b> <a href="Expected_loss" title="Expected loss">Expected loss</a></li>
<li><b>JTD</b> – Jump-to-default, where the <a href="Credit_default_swap#Risk" title="Credit default swap">reference entity suddenly defaults</a></li>
<li><b>LGD</b> <a href="Loss_given_default" title="Loss given default">Loss given default</a></li>
<li><b>PD</b> <a href="Probability_of_default" title="Probability of default">Probability of default</a></li>
<li><b>PFE</b> <a href="Potential_future_exposure" class="mw-redirect" title="Potential future exposure">Potential future exposure</a></li>
<li><b>SA-CCR</b> <a href="Standardized_approach_(counterparty_credit_risk)" title="Standardized approach (counterparty credit risk)">The standardised approach to counterparty credit risk</a></li>
<li><b>VAR</b> <a href="Value_at_risk" title="Value at risk">Value at risk</a></li></ul>
<div class="mw-heading mw-heading2"><h2 id="See_also">See also</h2></div>
<ul><li><a href="Credit_(finance)" class="mw-redirect" title="Credit (finance)">Credit (finance)</a></li>
<li><a href="Credit_spread_curve" class="mw-redirect" title="Credit spread curve">Credit spread curve</a></li>
<li><a href="Criticism_of_credit_scoring_systems_in_the_United_States" title="Criticism of credit scoring systems in the United States">Criticism of credit scoring systems in the United States</a></li>
<li><a href="CS01" class="mw-redirect" title="CS01">CS01</a></li>
<li><a href="Default_(finance)" title="Default (finance)">Default (finance)</a></li>
<li><a href="Distressed_securities" title="Distressed securities">Distressed securities</a></li>
<li><a href="Jarrow%E2%80%93Turnbull_model" title="Jarrow–Turnbull model">Jarrow–Turnbull model</a></li>
<li><a href="KMV_model" class="mw-redirect" title="KMV model">KMV model</a></li>
<li><a href="Merton_model" title="Merton model">Merton model</a></li></ul>
<div class="mw-heading mw-heading2"><h2 id="References">References</h2></div>
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<li id="cite_note-15"><span class="mw-cite-backlink"><b><a href="#cite_ref-15">^</a></b></span> <span class="reference-text">Investopedia. <a rel="nofollow" class="external text" href="http://www.investopedia.com/terms/c/counterpartyrisk.asp">Counterparty risk</a>. Retrieved 2008-10-06</span>
</li>
<li id="cite_note-16"><span class="mw-cite-backlink"><b><a href="#cite_ref-16">^</a></b></span> <span class="reference-text">Tom Henderson. <a rel="nofollow" class="external text" href="https://seekingalpha.com/article/58780-counterparty-risk-and-the-subprime-fiasco">Counterparty Risk and the Subprime Fiasco</a>. 2008-01-02. Retrieved 2008-10-06</span>
</li>
<li id="cite_note-17"><span class="mw-cite-backlink"><b><a href="#cite_ref-17">^</a></b></span> <span class="reference-text"><cite id="CITEREFBrigo,_DamianoAndrea_Pallavicini2007" class="citation book cs1">Brigo, Damiano; Andrea Pallavicini (2007). <i>Counterparty Risk under Correlation between Default and Interest Rates. In: Miller, J., Edelman, D., and Appleby, J. (Editors), Numerical Methods for Finance</i>. Chapman Hall. <a href="ISBN_(identifier)" class="mw-redirect" title="ISBN (identifier)">ISBN</a> <bdi>978-1-58488-925-0</bdi>.</cite><a rel="nofollow" class="external text" href="http://ssrn.com/abstract=926067">Related SSRN Research Paper</a></span>
</li>
<li id="cite_note-18"><span class="mw-cite-backlink"><b><a href="#cite_ref-18">^</a></b></span> <span class="reference-text"><cite id="CITEREFOrlandoBufaloPenikasZurlo2021" class="citation cs2">Orlando, Giuseppe; Bufalo, Michele; Penikas, Henry; Zurlo, Concetta (2021-10-28), <span class="id-lock-subscription" title="Paid subscription required"><a rel="nofollow" class="external text" href="https://www.worldscientific.com/doi/10.1142/9789811252365_0001">"Distributions Commonly Used in Credit and Counterparty Risk Modeling"</a></span>, <i>Modern Financial Engineering</i>, Topics in Systems Engineering, vol. 2, WORLD SCIENTIFIC, pp. <span class="nowrap">3–</span>23, <a href="Doi_(identifier)" class="mw-redirect" title="Doi (identifier)">doi</a>:<a rel="nofollow" class="external text" href="https://doi.org/10.1142%2F9789811252365_0001">10.1142/9789811252365_0001</a>, <a href="ISBN_(identifier)" class="mw-redirect" title="ISBN (identifier)">ISBN</a> <bdi>978-981-12-5235-8</bdi>, <a href="S2CID_(identifier)" class="mw-redirect" title="S2CID (identifier)">S2CID</a> <a rel="nofollow" class="external text" href="https://api.semanticscholar.org/CorpusID:245970287">245970287</a><span class="reference-accessdate">, retrieved <span class="nowrap">2022-04-10</span></span></cite></span>
</li>
<li id="cite_note-19"><span class="mw-cite-backlink"><b><a href="#cite_ref-19">^</a></b></span> <span class="reference-text"><a rel="nofollow" class="external text" href="http://moneyterms.co.uk/debt_covenants/">Debt covenants</a></span>
</li>
<li id="cite_note-20"><span class="mw-cite-backlink"><b><a href="#cite_ref-20">^</a></b></span> <span class="reference-text"><a rel="nofollow" class="external text" href="http://www.businessinsider.com/mba-mondays-diversification-2010-6">MBA Mondays:Risk Diversification</a></span>
</li>
<li id="cite_note-21"><span class="mw-cite-backlink"><b><a href="#cite_ref-21">^</a></b></span> <span class="reference-text"><a href="Moody's_Analytics" title="Moody's Analytics">Moody's Analytics</a> (2008). <a rel="nofollow" class="external text" href="https://www.moodysanalytics.com/-/media/whitepaper/before-2011/03-25-08-a-brief-history-of-active-credit-portfolio-management.pdf">A Brief History of Active Credit Portfolio Management</a></span>
</li>
</ol></div>
<div class="mw-heading mw-heading2"><h2 id="Further_reading">Further reading</h2></div>
<ul><li><cite id="CITEREFBluhm,_ChristianLudger_OverbeckChristoph_Wagner2002" class="citation book cs1">Bluhm, Christian; Ludger Overbeck & Christoph Wagner (2002). <i>An Introduction to Credit Risk Modeling</i>. Chapman & Hall/CRC. <a href="ISBN_(identifier)" class="mw-redirect" title="ISBN (identifier)">ISBN</a> <bdi>978-1-58488-326-5</bdi>.</cite></li>
<li><cite id="CITEREFDamiano_Brigo_and_Massimo_Masetti2006" class="citation book cs1"><a href="Damiano_Brigo" title="Damiano Brigo">Damiano Brigo</a> and Massimo Masetti (2006). <i>Risk Neutral Pricing of Counterparty Risk, in: Pykhtin, M. (Editor), Counterparty Credit Risk Modeling: Risk Management, Pricing and Regulation</i>. Risk Books. <a href="ISBN_(identifier)" class="mw-redirect" title="ISBN (identifier)">ISBN</a> <bdi>978-1-904339-76-2</bdi>.</cite></li>
<li><cite id="CITEREFOrlando,_GiuseppeBufalo_MichelePenikas_HenryZurlo_Concetta2022" class="citation book cs1">Orlando, Giuseppe; Bufalo Michele; Penikas Henry; Zurlo Concetta (2022). <i>Modern Financial Engineering: Counterparty, Credit, Portfolio and Systemic Risks</i>. World Scientific. <a href="ISBN_(identifier)" class="mw-redirect" title="ISBN (identifier)">ISBN</a> <bdi>978-981-125-235-8</bdi>.</cite></li>
<li><cite id="CITEREFde_Servigny,_ArnaudOlivier_Renault2004" class="citation book cs1">de Servigny, Arnaud; Olivier Renault (2004). <i>The Standard & Poor's Guide to Measuring and Managing Credit Risk</i>. McGraw-Hill. <a href="ISBN_(identifier)" class="mw-redirect" title="ISBN (identifier)">ISBN</a> <bdi>978-0-07-141755-6</bdi>.</cite></li>
<li><cite id="CITEREFDarrell_Duffie_and_Kenneth_J._Singleton2003" class="citation book cs1"><a href="Darrell_Duffie" title="Darrell Duffie">Darrell Duffie</a> and <a href="Kenneth_J._Singleton" class="mw-redirect" title="Kenneth J. Singleton">Kenneth J. Singleton</a> (2003). <i>Credit Risk: Pricing, Measurement, and Management</i>. Princeton University Press. <a href="ISBN_(identifier)" class="mw-redirect" title="ISBN (identifier)">ISBN</a> <bdi>978-0-691-09046-7</bdi>.</cite></li>
<li><a rel="nofollow" class="external text" href="http://www.bis.org/publ/bcbs75.htm">Principles for the management of credit risk</a> from the Bank for International Settlements</li></ul>
<div class="mw-heading mw-heading2"><h2 id="External_links">External links</h2></div>
<ul><li><a rel="nofollow" class="external text" href="https://www.springer.com/gp/book/9783030428655">Bank Management and Control</a>, Springer Nature – Management for Professionals, 2020</li>
<li><a rel="nofollow" class="external text" href="https://www.crif.in/products-and-services/predictive-analytics-scorecards">Credit Risk Modelling</a>, – information on credit risk modelling and decision analytics</li>
<li><a rel="nofollow" class="external text" href="http://ssrn.com/abstract_id=1032522">A Guide to Modeling Counterparty Credit Risk</a> – SSRN Research Paper, July 2007</li>
<li><a rel="nofollow" class="external text" href="https://web.archive.org/web/20090804080317/http://defaultrisk.com/">Defaultrisk.com</a> – research and white papers on credit risk modelling</li>
<li><a rel="nofollow" class="external text" href="http://www.risk.net/type/technical-paper/source/journal-of-credit-risk/">The Journal of Credit Risk</a> publishes research on credit risk theory and practice.</li>
<li><a rel="nofollow" class="external text" href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3206607">Soft Data Modeling Via Type 2 Fuzzy Distributions for Corporate Credit Risk Assessment in Commercial Banking</a> SSRN Research Paper, July 2018</li></ul>
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<ul><li><a href="Consumer_credit_risk" title="Consumer credit risk">Consumer credit risk</a></li>
<li><a href="Sovereign_credit_risk" title="Sovereign credit risk">Sovereign credit risk</a></li>
<li><a href="Settlement_risk" title="Settlement risk">Settlement risk</a></li>
<li><a href="Default_(finance)" title="Default (finance)">Default risk</a></li>
<li><a href="Concentration_risk" title="Concentration risk">Concentration risk</a></li>
<li><a href="Credit_derivative" title="Credit derivative">Credit derivative</a></li>
<li><a href="Securitization" title="Securitization">Securitization</a></li></ul>
</div></td></tr><tr><th scope="row" class="navbox-group" style="width:1%"><a href="Market_risk" title="Market risk">Market risk</a></th><td class="navbox-list-with-group navbox-list navbox-even" style="width:100%;padding:0"><div style="padding:0 0.25em">
<ul><li><a href="Commodity_risk" title="Commodity risk">Commodity risk</a> (e.g. <a href="Volume_risk" title="Volume risk">Volume risk</a>, <a href="Basis_risk" title="Basis risk">Basis risk</a>, <a href="Shape_risk" title="Shape risk">Shape risk</a>, <a href="Holding_period_risk" title="Holding period risk">Holding period risk</a>, <a href="Price_area_risk" class="mw-redirect" title="Price area risk">Price area risk</a>)</li>
<li><a href="Equity_risk" title="Equity risk">Equity risk</a></li>
<li><a href="Valuation_risk" title="Valuation risk">Valuation risk</a></li>
<li><a href="Foreign_exchange_risk" title="Foreign exchange risk">FX risk</a></li>
<li><a href="Margining_risk" title="Margining risk">Margining risk</a></li>
<li><a href="Interest_rate_risk" title="Interest rate risk">Interest rate risk</a></li>
<li><a href="Inflation_risk" class="mw-redirect" title="Inflation risk">Inflation risk</a></li>
<li><a href="Volatility_risk" title="Volatility risk">Volatility risk</a></li>
<li><a href="Liquidity_risk" title="Liquidity risk">Liquidity risk</a> (e.g. <a href="Refinancing_risk" title="Refinancing risk">Refinancing risk</a>, <a href="Deposit_risk" title="Deposit risk">Deposit risk</a>)</li></ul>
</div></td></tr><tr><th scope="row" class="navbox-group" style="width:1%"><a href="Operational_risk" title="Operational risk">Operational risk</a></th><td class="navbox-list-with-group navbox-list navbox-odd" style="width:100%;padding:0"><div style="padding:0 0.25em">
<ul><li><a href="Operational_risk_management" title="Operational risk management">Operational risk management</a></li>
<li><a href="Business_risk" class="mw-redirect" title="Business risk">Business risk</a></li>
<li><a href="Model_risk" title="Model risk">Model risk</a></li>
<li><a href="Reputational_risk" class="mw-redirect" title="Reputational risk">Reputational risk</a></li>
<li><a href="Country_risk" title="Country risk">Country risk</a></li>
<li><a href="Political_risk" title="Political risk">Political risk</a></li>
<li><a href="Legal_risk" title="Legal risk">Legal risk</a></li></ul>
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<ul><li><a href="Execution_risk" class="mw-redirect" title="Execution risk">Execution risk</a></li>
<li><a href="Profit_risk" title="Profit risk">Profit risk</a></li>
<li><a href="Systemic_risk" title="Systemic risk">Systemic risk</a></li>
<li><a href="Non-financial_risk" title="Non-financial risk">Non-financial risk</a></li></ul>
</div></td></tr></tbody></table><div></div></td></tr><tr><th scope="row" class="navbox-group" style="width:1%"><a href="Financial_risk_modeling" title="Financial risk modeling">Modeling</a></th><td class="navbox-list-with-group navbox-list navbox-odd" style="width:100%;padding:0"><div style="padding:0 0.25em">
<ul><li><a href="Arbitrage_pricing_theory" title="Arbitrage pricing theory">Arbitrage pricing theory</a></li>
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<li><a href="Expected_shortfall" title="Expected shortfall">Conditional Value-at-Risk (CVaR)</a></li>
<li><a href="Copula_(probability_theory)" class="mw-redirect" title="Copula (probability theory)">Copula</a></li>
<li><a href="Drawdown_(economics)" title="Drawdown (economics)">Drawdown</a></li>
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<li><a href="Omega_ratio" title="Omega ratio">Omega ratio</a></li>
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<li><a href="Risk_parity" title="Risk parity">Risk parity</a></li>
<li><a href="Sharpe_ratio" title="Sharpe ratio">Sharpe ratio</a></li>
<li><a href="Sortino_ratio" title="Sortino ratio">Sortino ratio</a></li>
<li><a href="Survival_analysis" title="Survival analysis">Survival analysis</a> (<a href="Proportional_hazards_model" title="Proportional hazards model">Proportional hazards model</a>)</li>
<li><a href="Tracking_error" title="Tracking error">Tracking error</a></li>
<li><a href="Value_at_risk" title="Value at risk">Value-at-Risk (VaR)</a> and extensions (<a href="Profit_at_risk" title="Profit at risk">Profit at risk</a>, <a href="Margin_at_risk" title="Margin at risk">Margin at risk</a>, <a href="Liquidity_at_risk" title="Liquidity at risk">Liquidity at risk</a>, <a href="Cash_flow_at_risk" class="mw-redirect" title="Cash flow at risk">Cash flow at risk</a>, <a href="Earnings_at_risk" title="Earnings at risk">Earnings at risk</a>)</li></ul>
</div></td></tr><tr><th scope="row" class="navbox-group" style="width:1%">Basic concepts</th><td class="navbox-list-with-group navbox-list navbox-even" style="width:100%;padding:0"><div style="padding:0 0.25em">
<ul><li><a href="Asset_allocation" title="Asset allocation">Asset allocation</a></li>
<li><a href="Asset_and_liability_management" title="Asset and liability management">Asset and liability management</a></li>
<li><a href="Asset_pricing" title="Asset pricing">Asset pricing</a></li>
<li><a href="Bad_debt" title="Bad debt">Bad debt</a></li>
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<ul><li><a href="Financial_adviser" title="Financial adviser">adviser</a></li>
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<li><a href="Financial_analyst" title="Financial analyst">analyst</a></li>
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<li><a href="Financial_betting" title="Financial betting">betting</a></li>
<li><a href="Financial_crime" title="Financial crime">crime</a></li>
<li><a href="Financial_engineering" title="Financial engineering">engineering</a></li>
<li><a href="Financial_law" title="Financial law">law</a></li>
<li><a href="Financial_risk" title="Financial risk">risk</a></li>
<li><a href="Financial_social_work" title="Financial social work">social work</a></li></ul></li>
<li><a href="Fundamental_analysis" title="Fundamental analysis">Fundamental analysis</a></li>
<li><a href="Growth_investing" title="Growth investing">Growth investing</a></li>
<li><a href="Hazard" title="Hazard">Hazard</a></li>
<li><a href="Hedge_(finance)" title="Hedge (finance)">Hedge</a></li>
<li><a href="Investment_management" title="Investment management">Investment management</a></li>
<li><a href="Risk" title="Risk">Risk</a></li>
<li><a href="Risk_pool" title="Risk pool">Risk pool</a></li>
<li><a href="Risk_of_ruin" title="Risk of ruin">Risk of ruin</a></li>
<li><a href="Systematic_risk" title="Systematic risk">Systematic risk</a></li>
<li><a href="Mathematical_finance" title="Mathematical finance">Mathematical finance</a></li>
<li><a href="Moral_hazard" title="Moral hazard">Moral hazard</a></li>
<li><a href="Risk-return_spectrum" class="mw-redirect" title="Risk-return spectrum">Risk-return spectrum</a></li>
<li><a href="Speculation" title="Speculation">Speculation</a></li>
<li><a href="Speculative_attack" title="Speculative attack">Speculative attack</a></li>
<li><a href="Statistical_finance" title="Statistical finance">Statistical finance</a></li>
<li><a href="Strategic_financial_management" title="Strategic financial management">Strategic financial management</a></li>
<li><a href="Stress_test_(financial)" title="Stress test (financial)">Stress test (financial)</a></li>
<li><a href="Structured_finance" title="Structured finance">Structured finance</a></li>
<li><a href="Structured_product" title="Structured product">Structured product</a></li>
<li><a href="Systemic_risk" title="Systemic risk">Systemic risk</a></li>
<li><a href="Toxic_asset" title="Toxic asset">Toxic asset</a></li></ul>
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<ul><li><a href="Financial_economics" title="Financial economics">Financial economics</a></li>
<li><a href="Investment_management" title="Investment management">Investment management</a></li>
<li><a href="Mathematical_finance" title="Mathematical finance">Mathematical finance</a></li></ul>
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