Credit risk is defined as the potential loss arising from a bank borrower or counterparty failing to meet its obligations in accordance with the agreed terms.
The Bank is exposed to credit risk in its lending and treasury activities, as borrowers and treasury counterparties could default on their contractual obligations, or the value of the Bank’s investments could become impaired.
Credit risk may also materialise in the form of a rating downgrade. Credit risk also covers settlement and pre-settlement risk. Similarly, collateral risk is considered as part of credit risk (collateral is essentially a credit risk mitigation technique). Overall, credit risk is a function of the amount of credit exposure and the credit quality of the borrower or transaction.
To address credit risk, the Financial Risk Division performs qualitative and quantitative assessment of risk factors and potential scenarios that may lead to a default situation through internal credit rating assessment of counterparties and defined credit limits that are regularly reviewed. Credit risk considerations are assessed right from the outset of project appraisal.
