Everyone lives with credit risk in many of their daily activities, from depositing savings in a financial institution to working as an employee or carrying out larger investment transactions.

There are several types of risk, the names of which depend on the situation in which the people or entities that are in debt find themselves. Some of the risks are:

1- Default risk which is also known as default which occurs when the debtor fails to meet its obligations, either partially or totally.

2- Downgrade or migration risk: occurs when the debtor's credit rating is affected.

3- Exposure risk: refers to the amount pending collection, over which there is some uncertainty due to the market situation or that of the debtor company itself.

4- Credit spread risk, which is nothing more than the risk of an increase in the yield of a bond in relation to another bond with the same maturity date.

To calculate it, lenders use a series of measures: the concept of expected loss, which is the loss in the event of default, the exposure to default and the probability of default.

Probability of default which is a credit rating measure given to a customer or contract in order to estimate the probability of default one year ahead. Exposure to default, which is another indicator used in the calculation of expected loss and principal and is defined as the value of debt that is outstanding at the time the customer defaults on the contract.

And finally, loss given default is another key metric in risk analysis and is defined as the percentage of the risk exposure that is not expected to be recovered in the event of default. All this is summarized by the banks in a formula, which warns them whether it is viable to give a loan or not, depending on the results obtained.

Translated by: A.M