Credit risk sources

  • Risks that banks face

    Credit Spread Risk: Credit spread risk is typically caused by the changeability between interest and risk-free return rates.
    Default Risk: When borrowers cannot make contractual payments, default risk can occur.
    Downgrade Risk: Risk ratings of issuers can be downgraded, thus resulting in downgrade risk..

  • What does credit risk arise from?

    Those include the financial health of the borrower, the severity of the consequences of a default (for both the borrower and the lender), the size of the credit extension, historical trends in default rates, and a variety of macroeconomic considerations, such as economic growth and interest rates..

  • Where does credit risk arise from?

    Credit risk arises when a corporate or individual borrower fails to meet their debt obligations.
    It is the probability that the lender will not receive the principal and interest payments of a debt required to service the debt extended to a borrower..

The principal sources of credit risk within the Group arise from loans and advances, contingent liabilities, commitments, debt securities and derivatives to customers, financial institutions and sovereigns.

What are the sources of credit risk?

For most banks, loans are the largest and most obvious source of credit risk.
However, there are other sources of credit risk both on and off the balance sheet.
Off-balance sheet items include:

  • letters of credit unfunded loan commitments
  • and lines of credit.

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