Understanding Credit Risk: Key Factors, Impacts, and Mitigation Strategies

Introduction

Credit risk is a critical concept in finance and banking, representing the potential that a borrower or counterparty will fail to meet their contractual obligations. This report aims to delve into the key factors influencing credit risk, examine its impacts on financial institutions and the broader economy, and discuss effective strategies for mitigating these risks. Given the increasing complexity of financial markets and the global economy, understanding credit risk has become essential for financial institutions, investors, and policymakers alike. This paper highlights the significance of credit risk management in ensuring financial stability and fostering economic growth.

Key Factors Influencing Credit Risk

Several factors contribute to the assessment and management of credit risk. Primarily, the borrower’s creditworthiness is a crucial determinant. Creditworthiness is typically evaluated through credit scores, which reflect past borrowing behavior, repayment history, and