The possibility that a borrower or counterparty will fail to meet their debt obligations or contractual commitments, potentially causing financial loss to the lender or investor. This risk varies based on the creditworthiness of the obligated party.
From Latin 'creditum' (something entrusted) and Old English 'risc' (danger). Credit risk assessment became formalized in banking during the 19th century industrial expansion, with modern quantitative methods developing in the late 20th century.
Credit risk is like lending your car to a friend - will they return it undamaged and on time? Banks face this dilemma millions of times daily, which is why they developed credit scores, collateral requirements, and insurance. Even 'risk-free' government bonds carry credit risk if the country might default!
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