How is credit risk defined?

Credit risk is fundamentally defined as the chance of a borrower defaulting on a loan. This definition captures the essence of credit risk, which is the potential that the lender will not receive the owed principal and interest, leading to financial losses. Understanding credit risk is crucial for lenders, as they must assess the likelihood that borrowers will fail to meet their debt obligations.

This assessment often involves analyzing the creditworthiness of the borrower, which can include looking at their credit history, income stability, and overall financial health. As such, the focus on default risk is central to managing credit risk effectively and is a key component in various financial decisions and risk management practices.

Other options discuss different types of risks unrelated to the borrower's ability to repay loans, making them irrelevant in defining credit risk specifically.