What does credit risk mean?
When it comes to the term credit risk, you will already be able to imagine what it is all about. The precise specific name, defines credit risk as the risk taken by banks when granting loans and credits. In particular, this definition aims at the default risk of a loan at the repayment rates and their absence. Interest rates and repayments are equally affected by credit risk and this is also the general basis for the interest rates offered by banks. The term credit risk in banking can be equated with the term revaluation claim in credit lending. A material object is used here as collateral to achieve the revaluation of the loan. The credit risk is closely related to the term creditworthiness of the borrower and the risk assessment takes place before a loan is granted by a bank.
Credit risk and the subdivision into phases
You will know risks as a term, the risk of an accident, the risk of a failure and the failure means that agreements are not kept. It is therefore always a matter of credit default when credit risk is mentioned. The bank must always include in its appraisals and audits the fact that, in the worst case, the repayment of a loan may fail. Here a phase by phase examination of the customer is carried out. Credit bureaus provide information about possible risk incidents and records of the corresponding previous credit behavior. If, for example, you have always paid all your bills on time, there are negative entries in the Schufa or you have even had a total loan default in the past. The bank, or rather the banks, are strongly networked here and they use this data to evaluate you as a customer. The assessment of credit risk is divided into various phases. There is therefore always a specific risk that a loan will not can come to a failure. Here, the bank that grants you a loan orients itself on indicators and facts. The Bank therefore always assesses the credit risk and the probability of default as part of the audit.
Terms related to credit risk
On the one hand, there are many concepts entwined around the subject of credit and risks. On the one hand, each loan generates an individual risk at a bank. For you this is understandable, because you as a person are liable with your income and assets for this credit, which you apply for and then get approved. However, banks have many customers and the main business with banks is making money is the lending business. Thus the risks add up and from an individual risk opposite you, a volume risk arises over all customers taking a credit with the bank. Banks thus generate a very large potential of risks through their business policies and you will also know from the past that many banks have granted loans that have almost led to the collapse of the banks. Thus the individual loan has a credit risk, but the sum of all loans granted by a bank also generates an overall risk. This risk is also subdivided into a diversification risk, as the Bank grants various loans with very differentiated risks. Private loans in particular are at risk and are in themselves subject to a much higher risk. However, you need to know that a bank can insure itself against this credit risk. In case you do not pay back your loan, the bank will simply cash in this insurance or evaluate the securities deposited. Banks are therefore relatively well protected as lenders and yet this risk can be a disaster for banks. You now know exactly what expresses this risk.