Different Types of Credit Risk Management
Rating agencies can establish credit scores for individuals that can be used by banks to help determine default risk. The two main types of default risk are investment grade and non-investment grade. These are two main categories, but sub-categories include:
- Credit Spread Risk: Credit spread risk is typically caused by the changeability between interest rates and the risk-free return rate.
- Default Risk: When borrowers are unable to make contractual payments, default risk can occur.
- Downgrade Risk: Risk ratings of issuers can be downgraded, thus resulting in downgrade risk.
- Concentration Risk or Industry Risk: When too much exposure is placed to any one industry or sector investors, or financial institutions can be at risk for concentration risk.
- Institutional Risk: If there is a breakdown in the legal structure, banks may encounter institutional risk. Institutional risk may also occur if there is an issue with an entity that oversees the contractual agreement between a lender and debtor