Meaning
What it means
Credit risk is the possibility that payment, interest, principal, settlement, or promised performance may fail because the responsible party weakens or defaults.
RISK LAB
Credit Risk
Credit risk is the risk that a borrower, issuer, counterparty, or obligated party cannot meet its financial commitments. In practice, it shows up in bonds, structured products, margin arrangements, counterparties, and any instrument where repayment or performance depends on someone else's financial strength.
Protection
What it protects
It protects against assuming that a payment stream is safe just because it is scheduled, rated, familiar, or historically reliable.
Mechanics
How it works
Credit risk changes when ratings change, issuer finances weaken, spreads widen, collateral values fall, or market confidence drops. The price may move before an actual default occurs.
Risk Signals
How it shows up
Watch for downgraded ratings, widening credit spreads, deteriorating financials, excessive yield compared with similar products, or client attraction to yield without understanding default risk.
Action
What to do
Check issuer quality, maturity, seniority, collateral, yield spread, product structure, and whether the credit exposure matches the user's risk capacity.
Avoid
What to avoid
Do not describe higher yield as free income. Extra yield usually exists because some form of risk is being accepted.
Risk Review Frame
Read the risk before you approve the action
Use this topic to separate a normal decision from a risk decision. A risk decision needs facts, fit, limits, and documentation before it can be treated as clean.
- Who must pay?
- What could stop payment?
- Is the yield compensating for risk?
- Can the account tolerate default or downgrade?
Topic Checklist
Before you mark this complete
- Define the risk in plain English.
- Identify what could go wrong for the client, account, product, or market condition.
- Connect the risk to capacity, tolerance, time horizon, liquidity, or documentation.
- Choose whether the situation is clean, incomplete, needs adjustment, or requires escalation.
- Confirm the review action before moving to the next topic.
Ready Check
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Topic Sequence