CISI Professional Practice Exam 2025 – Complete Prep Guide

Credit risk refers specifically to the potential for financial loss that may arise when a borrower fails to meet their obligations as stipulated in a loan or credit agreement. In the context of financial institutions, this is primarily concerned with the possibility that a borrower may default on their loan payments, leading to a financial loss for the lender. Financial institutions must assess this risk to determine the creditworthiness of borrowers before extending loans, effectively managing their overall risk exposure in the lending process.

This concept is critical for institutions as it directly affects their profitability and creditworthiness. Effective credit risk management includes rigorous credit assessments, monitoring of borrower performance, and maintaining appropriate reserves for potential loan losses. Understanding this aspect helps institutions make informed lending decisions, maintain regulatory compliance, and protect their financial health.

Other concepts, such as the fluctuations in interest rates, volatility in marketable securities, and risk of regulatory penalties, do not specifically encompass the dynamics of borrower default and repayment issues, which are central to credit risk. Therefore, the focus on borrower repayment capabilities distinguishes credit risk from these other financial risks.