The risk category describing the possibility that a borrower or creditor will fail to meet financial obligations is known as which risk?

The risk category describing the possibility that a borrower or creditor will fail to meet financial obligations is known as which risk?

• A. Audit
• B. Change risk
• C. Credit risk
• D. Compliance risk

Answer: (C)

Credit risk is the risk that a borrower or counterparty will fail to fulfill financial obligations, such as not repaying a loan or not meeting interest and principal payments, potentially leading to financial losses. This category specifically captures the possibility of default or near-default by someone who owes money, which is central to lending and credit operations. In practice, managers assess credit risk to set appropriate credit limits, monitor exposures, and estimate reserves for potential losses. The other terms describe different concerns—compliance risk concerns failing to follow laws or regulations, change risk relates to risks introduced by implementing changes in systems or processes, and audit risk concerns the possibility that an audit misses a material misstatement—so they do not pertain to the likelihood of failure to meet financial obligations.

Credit risk is the risk that a borrower or counterparty will fail to fulfill financial obligations, such as not repaying a loan or not meeting interest and principal payments, potentially leading to financial losses. This category specifically captures the possibility of default or near-default by someone who owes money, which is central to lending and credit operations. In practice, managers assess credit risk to set appropriate credit limits, monitor exposures, and estimate reserves for potential losses. The other terms describe different concerns—compliance risk concerns failing to follow laws or regulations, change risk relates to risks introduced by implementing changes in systems or processes, and audit risk concerns the possibility that an audit misses a material misstatement—so they do not pertain to the likelihood of failure to meet financial obligations.