What does 'credit risk' refer to?

Credit risk refers to the likelihood that a borrower will be unable to meet their financial obligations as they come due. This concept is particularly important in the lending and investment sectors. When lending money, banks and financial institutions assess the creditworthiness of borrowers to determine the risk of default. If a borrower defaults on a loan, the lender may face significant financial losses, which is why understanding and managing credit risk is so crucial in finance.

In contrast, potential losses from investment activities could relate to various risks, but they don’t specifically outline the circumstances surrounding a borrower's ability to repay a debt. Similarly, risks from adverse global market conditions encompass broader economic factors affecting multiple investments and are not limited to individual borrower risks. The impact of inflation on savings is a distinct financial issue and does not directly relate to a borrower's creditworthiness or the likelihood of defaulting on an obligation. Thus, focusing on a borrower's ability to fulfill their commitments accurately defines credit risk.