Credit risk is the possibility of losing a lender holds due to a 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 will not 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 are unable or unwilling to pay.
A credit risk can be of the following types:
Credit default risk – 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 derivatives.
This page is automatically generated and may contain information that is not correct, complete, up-to-date, or relevant to your search query. The same applies to every other page on this website. Please make sure to verify the information with EPFL's official sources.
A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets. Whereby banks play an important role in financial stability and the economy of a country, most jurisdictions exercise a high degree of regulation over banks. Most countries have institutionalized a system known as fractional-reserve banking, under which banks hold liquid assets equal to only a portion of their current liabilities.
In finance, a credit derivative refers to any one of "various instruments and techniques designed to separate and then transfer the credit risk" or the risk of an event of default of a corporate or sovereign borrower, transferring it to an entity other than the lender or debtholder. An unfunded credit derivative is one where credit protection is bought and sold between bilateral counterparties without the protection seller having to put up money upfront or at any given time during the life of the deal unless an event of default occurs.
Credit risk is the possibility of losing a lender holds due to a 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.
This course is an introduction to quantitative risk management that covers standard statistical methods, multivariate risk factor models, non-linear dependence structures (copula models), as well as p
This course gives an introduction to the modeling of interest rates and credit risk. Such models are used for the valuation of interest rate securities with and without credit risk, the management and
The course provides a market-oriented framework for analyzing the major financial decisions made by firms. It provides an introduction to valuation techniques, investment decisions, asset valuation, f
This thesis examines how banks choose their optimal capital structure and cash reserves in the presence of regulatory measures. The first chapter, titled Bank Capital Structure and Tail Risk, presen
This thesis develops three models that study the motivation of various agents to take on debt,
and the impact that excessive financial leverage can have on social welfare.
In the chapter "Short-term B
Covers credit analysis examples, variations by loan type, and specific cases.
Explores the Peaks-Over-Threshold model assumptions, implications, and estimation methods, including fitting a GPD model to exceedances.
Explores bank lending, credit risk, SVB's failure, loan terms, and state guarantees' impact on credit supply.
The modeling of the probability of joint default or total number of defaults among the firms is one of the crucial problems to mitigate the credit risk since the default correlations significantly aff