Credit Risk is the possibility of a loss resulting from a borrower's failure to repay a loan or meet contractual obligations. The most common type of credit risk is default, which occurs when the borrower does not make payments on time or in full. Other types of credit risks include prepayment, interest rate, and currency risks.Credit risk has become increasingly important in recent years as lending has increased and borrowers have become more likely to default. A number of factors can contribute to credit risk, including economic conditions, the financial condition of the borrower, and the quality of the loan collateral.There are a number of ways to manage credit risk, including due diligence procedures during origination, hedging strategies such as derivatives contracts, and portfolio management techniques such as diversification. Credit unions have been particularly successful in managing credit risk by using conservative underwriting standards and focusing on member education.Despite these measures, however, all lenders face some degree of credit risk exposure and must be prepared for potential losses if borrowers fail to repay their loans.
