Which of the following best describes a credit risk scenario?

• A. A loan is repaid on time.
• B. A borrower fails to repay the loan.
• C. A borrower upgrades their credit line.
• D. A bank reduces its capital ratio.

Answer: (B)

Credit risk is the possibility that a borrower won’t meet their payment obligations. When a borrower fails to repay the loan, the lender faces a real risk of financial loss from unpaid principal and interest, which is the quintessential credit risk event. If payments are made on time, that signals the borrower’s ability and willingness to pay and thus involves little or no credit risk at that moment. Upgrading a credit line changes how much credit is available and the terms of that facility; it doesn’t by itself describe a failure to repay. A bank reducing its capital ratio is about the institution’s overall financial buffer and regulatory stance, not about a specific borrower’s likelihood of default.