Issues Identification- Credit Risks

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Issues identification

Credit Risk

The issues identification the type of risk involved both financial institution that related to the credit risk that is credit is the risk of losses owing to the fact that counterparties may be unwilling or unable to fulfil their contractual obligations. Its effect is measured by the cost of replacing cash flows if the other party defaults. This loss encompasses the exposure ,or amount at risk, and the recovery rate, which is the proportion paid back to the lender, usually measured in terms of ‘cents on the dollar’. Losses owing to credit risk, however , can occur before the actual default. More generally , credit risk should be defined as the potential loss in mark-to-market value that may be incurred owing to the occurrence of a credit event. A credit event occurs when there is a charge in the counterparty’s ability to perform its obligations. Thus changes in market’s perception of default also can be viewed as credit risk, credit risk, creating some overlap between credit risk and market risk. Credit risk also includes sovereign risk. This occurs, for instance, when countries impose foreign-exchange controls that make it impossible for counterparties to honour their obligations. Beside that, credit risk of financial loss owing to counterparty failure to perform its contractual obligations. The credit risk is far more important than market risk. Time and again, lack of diversification of credit risk has been primary
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