In banking, credit risk is the risk that a loan recipient what?

• A. Repays the loan on time
• B. Does not pay back the money borrowed
• C. Changes collateral value during the loan
• D. Relies on government guarantees

Answer: (B)

Credit risk is the risk that a borrower will fail to repay the loan as agreed, meaning they default on the principal and interest. When a borrower doesn’t pay, the lender faces a loss, which is the core idea behind credit risk. Paying on time would avoid this risk, so it’s not what credit risk describes. Fluctuations in collateral value affect how much a lender might recover after a default, not the likelihood of default itself. Government guarantees can reduce potential losses in some cases, but the fundamental concept is the possibility of nonpayment by the borrower.