Credit Risk

One of the most overused expressions on the trading floor is “That’ll never happen.” Some of the things that people have said would never happen include Lehman going bust and the US government’s credit rating being downgraded from triple A to double A. These were almost inconceivable events. These are credit-related risks, which shows that credit in particular is one risk that people struggle with. When a bank gives a loan to Microsoft, the immediate response is that Microsoft will never default. However, there was a time when everyone said the same about Ford and General Motors.

When we think about what a bank is, we often think about an entity which gives out credit in the form of loans, mortgages or credit cards. It should ...

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