Credit Risk

What Is Credit Risk?

Credit risk is the potential for a loss when a borrower cannot make payments as obligated to a lender. Credit risk is commonly measured and communicated as the likelihood or probability of an individual borrower’s default. Lenders use models such as probability of default (PD), loss given default (LGD), and exposure at default (EAD) to analyze risk, rank customers, and decide on appropriate strategies for managing this risk.

Effective techniques for managing and analyzing risk include:

MATLAB plot of the cumulative accuracy profile curve with fraction of borrowers on the x-axis and fraction of defaulters on the y-axis.

Analyze and manage risk associated with lending using MATLAB®.

See also: risk management, counterparty credit risk, credit derivatives, credit scoring model, IFRS 9, fraud analytics, climate stress testing