Counterparty Credit Risk

Counterparty credit risk is the risk that one party in a financial transaction may not fulfill their obligations, such as failing to pay back a loan or complete a trade. This risk is significant in agreements like derivatives or loans, where the relationship between two parties depends on trust. If one party defaults, it can lead to financial losses for the other party. Financial institutions assess this risk carefully by evaluating the creditworthiness of their counterparties, using ratings and other measures to ensure they can manage potential losses effectively.