Credit Risk

Credit Risk

Credit risk is the possibility of a borrower failing to repay a loan or other financial obligation. In the context of securitisations, credit risk is the risk that the underlying assets, such as loans or other financial assets, will default.

There are a number of factors that can contribute to credit risk, including:

• The creditworthiness of the borrowers: The creditworthiness of the borrowers is the most important factor in determining credit risk. Borrowers with good credit histories are less likely to default than borrowers with poor credit histories.
• The structure of the securitisation: The structure of the securitisation also plays a role in determining credit risk. For example, a securitisation with a senior/subordinated structure is typically less risky than a securitisation without a senior/subordinated structure.
• The underlying assets: The underlying assets are also important in determining credit risk. For example, a securitisation of mortgages is typically less risky than a securitisation of credit cards.

Credit risk is an important factor in securitisation, as it can affect the value of the securities that are issued. Investors will typically require a higher yield on securities with higher credit risk.

In Australian English, credit risk is also known as credit exposure or default risk.

Here are some examples of credit risk in securitisation:

• A securitisation of mortgages might have a credit risk of 5%. This means that there is a 5% chance that one or more of the mortgages will default.
• A securitisation of credit cards might have a credit risk of 10%. This means that there is a 10% chance that one or more of the credit cards will default.