Difference between revisions of "Credit Risk"
From Open Risk Manual
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== Definition == | == Definition == | ||
| − | '''Credit Risk''' denotes a broad category of [[Loss | adverse financial outcomes]] arising from [[Credit Event | credit events]] (default, bankruptcy) associated with a [[Legal Entity | legal entity]] reneging on its contractual obligations (for | + | '''Credit Risk''' denotes a broad category of [[Loss | adverse financial outcomes]] arising from [[Credit Event | credit events]] (default, bankruptcy) associated with a [[Legal Entity | legal entity]] reneging on its contractual obligations (typically for [[Payment]]) |
== Dimensions == | == Dimensions == | ||
| + | Credit risk is a broad phenomenon as it applies to almost every conceivable economic activity. It is useful to enumerate some dimensions that can help narrow down more specific domains: | ||
| − | + | * The ''Legal Entities involved'': These can range in size from | |
| + | ** any [[Natural Person]] legally able to enter into contractual relationships, | ||
| + | ** [[SME Lending | Small and medium sized]] enterprises | ||
| + | ** [[Corporate Lending]] | ||
| + | ** to supranational entities representing very large populations | ||
| + | * The [[Financial Products]] or ''Contracts involved'': These can be either explicit lending contracts, or other contractual relationships that may have embedded credit risk | ||
| + | * The Markets involved: Ranging from the Banking system, Fixed Income markets ([[Securitisation]]), Over-the-counter markets, Peer-to-peer lending etc. | ||
| − | + | == Risk Factors == | |
| − | + | Detailed analysis of credit [[Risk Factor | risk factors]] requires narrowing down the domain as per the above dimensions and is captured in separate entries. | |
| − | + | * It is generally considered that the [[Ability and Willingness to Pay]] captures at a high level the main underlying driver of credit risk | |
| − | + | * Credit risk is generally considered to exhibity material dependency (See [[Default Correlation]]) | |
| − | == Factors == | + | * Credit performance at the aggregate level can be seen as being driven by (and also driving) [[Macroeconomic Factors]] |
| − | Detailed analysis of credit [[Risk Factor | risk factors]] requires narrowing down the domain | ||
== Mitigation == | == Mitigation == | ||
| Line 17: | Line 23: | ||
== Issues and Challenges == | == Issues and Challenges == | ||
| − | * Credit risk is highly context dependent (dynamic nature) and in general not amenable to rigid frameworks | + | * Credit risk is highly context dependent (dynamic nature) and in general not amenable to rigid frameworks for either quantification or management |
* Because of market / product segmentation some forms of credit risk are denoted as [[Counterparty Risk]], although there is no intrinsic difference | * Because of market / product segmentation some forms of credit risk are denoted as [[Counterparty Risk]], although there is no intrinsic difference | ||
* The active trading of credit obligations which is common in modern finance transforms credit risk into a form of [[Market Risk]] generating a number of more complicated risk phenomena | * The active trading of credit obligations which is common in modern finance transforms credit risk into a form of [[Market Risk]] generating a number of more complicated risk phenomena | ||
| Line 31: | Line 37: | ||
[[Category:Risk]] | [[Category:Risk]] | ||
[[Category:Credit Risk]] | [[Category:Credit Risk]] | ||
| + | [[Category:Credit Events]] | ||
[[Category:Risk Management]] | [[Category:Risk Management]] | ||
Revision as of 12:02, 31 March 2021
Definition
Credit Risk denotes a broad category of adverse financial outcomes arising from credit events (default, bankruptcy) associated with a legal entity reneging on its contractual obligations (typically for Payment)
Dimensions
Credit risk is a broad phenomenon as it applies to almost every conceivable economic activity. It is useful to enumerate some dimensions that can help narrow down more specific domains:
- The Legal Entities involved: These can range in size from
- any Natural Person legally able to enter into contractual relationships,
- Small and medium sized enterprises
- Corporate Lending
- to supranational entities representing very large populations
- The Financial Products or Contracts involved: These can be either explicit lending contracts, or other contractual relationships that may have embedded credit risk
- The Markets involved: Ranging from the Banking system, Fixed Income markets (Securitisation), Over-the-counter markets, Peer-to-peer lending etc.
Risk Factors
Detailed analysis of credit risk factors requires narrowing down the domain as per the above dimensions and is captured in separate entries.
- It is generally considered that the Ability and Willingness to Pay captures at a high level the main underlying driver of credit risk
- Credit risk is generally considered to exhibity material dependency (See Default Correlation)
- Credit performance at the aggregate level can be seen as being driven by (and also driving) Macroeconomic Factors
Mitigation
Methodologies and procedures aiming to contain, manage or minimize credit risk are usually denoted Credit Risk Management or Credit Portfolio Management
Issues and Challenges
- Credit risk is highly context dependent (dynamic nature) and in general not amenable to rigid frameworks for either quantification or management
- Because of market / product segmentation some forms of credit risk are denoted as Counterparty Risk, although there is no intrinsic difference
- The active trading of credit obligations which is common in modern finance transforms credit risk into a form of Market Risk generating a number of more complicated risk phenomena
- Large scale credit risk manifestations (financial crises) can disrupt entire economies with potentially very adverse outcomes, even complete societal collapse
Disclaimer
This entry annotates a FIBO Ontology Class. FIBO is a trademark and the FIBO Ontology is copyright of the EDM Council, released under the MIT Open Source License. There is no guarantee that the content of this page will remain aligned with or correctly interprets the concepts covered by the FIBO ontology.
