Credit Risk: Credit Risk is the possibility of a loss resulting from a borrower’s failure to repay a loan or meet contractual obligations. Traditionally, it refers to the risk that a lender may not receive the owed principal and interest, which results in an interruption of cash flows and increased costs for collection. Excess cash flows may be written to provide additional cover for credit risk. When a lender faces heightened credit risk, it can mitigate via a higher coupon rate, which provides for greater cash flows.
Although it’s impossible to know the exact who will default
on obligations, properly assessing and managing credit risk can lessen the
severity of a loss. Interest payments from the borrower or issuer of a debt
obligation are a lender’s of investor’s reward for assuming credit risk.
Loan portfolio and risk management is not just about
avoiding risk. It is also about balancing risk while seizing opportunities in
your marketplace and serving your community well. So, go for the opportunities
while balancing your risk management strategy. It can help make your
organization even more successful.
Example: A
company extends credit to its customers but one of them goes bankrupt and is
unable to repay the outstanding amount. This can lead to a bad debt expense for
the company.
Treasury Risk: Treasury risk refers to the potential financial
losses or adverse effects on a company’s financial health due to the various
risks encountered in managing its treasury operations. Treasury operations
involve the management of cash, liquidity, investments, funding, and financial
risk exposures such as interest rates, foreign exchange rates and commodity prices.
Treasury risk encompasses several specific types of risk, including liquidity
risk, interest rate risk, foreign exchange risk, and credit risk.
Example of Treasury risk:
Foreign exchange risk (Currency risk): Foreign
exchange risk arises from fluctuations in exchange rates that can affect the
value of a company’s financial transactions denominated in foreign currencies.