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Credit risk

A credit risk is the risk of default on a debt that may arise from a borrower failing to make required payments. In the first resort, the risk is that of the lender and includes lost principal and interest, disruption to cash flows, and increased collection costs. The loss may be complete or partial. In an efficient market, higher levels of credit risk will be associated with higher borrowing costs. Because of this, measures of borrowing costs such as yield spreads can be used to infer credit risk levels based on assessments by market participants.

Losses can arise in a number of circumstances, for example:

  • A consumer may fail to make a payment due on a mortgage loan, credit card, line of credit, or other loan.
  • A company is unable to repay asset-secured fixed or floating charge debt.
  • A business or consumer does not pay a trade invoice when due.
  • A business does not pay an employee's earned wages when due.
  • A business or government bond issuer does not make a payment on a coupon or principal payment when due.
  • An insolvent insurance company does not pay a policy obligation.
  • An insolvent bank won't return funds to a depositor.
  • A government grants bankruptcy protection to an insolvent consumer or business.

To reduce the lender's credit risk, the lender may perform a credit check on the prospective borrower, may require the borrower to take out appropriate insurance, such as mortgage insurance, or seek security over some assets of the borrower or a guarantee 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 interest rate that the debtor will be asked to pay on the debt. Credit risk mainly arises when borrowers unable to pay due willingly or unwilingly.

Wiktionary

credit risk

n. (context finance English) The risk of loss due to a debtor's non-payment of a loan or other line of credit.

Usage examples of "credit risk".

That opened up the clinic doors to a large fraction of the world's population, since a high-income professional facing a century of productivity is a pretty good credit risk.

The point is are they a good credit risk up to such and such an amount.

But the Big Computer hsdnt mixed me yet, so I was still a fat gold credit risk.

Davina suddenly took on the grave demeanor of a banker explaining poor credit risk.

The jailer had submitted my name to the central city banks and had discovered, within a minute or so, that I was a good credit risk and had plenty of cards already.

In society at large, he finds himself eminently marriageable and a good credit risk, thus enjoying the approval of those two bastions of conservative appraisal—.

I was such a fantastically good credit risk that I already owned a Diners Club card.