Credit risk

Credit risk is exposure to loss if a borrower, customer or other counterparty fails to perform an obligation. Its size depends on the likelihood of default, exposure at that time, recoveries and contractual protections. It applies to loans, bonds, receivables and derivative counterparties, though measurement and legal terms differ. A credit rating or collateral can inform assessment but does not eliminate uncertainty. Portfolio concentration and correlation can magnify losses when several counterparties are affected by the same shock.