ACCA Strategic Professional · Strategic Business Leader · Managing, monitoring and mitigating risk
Marlow Bank has lent heavily to a property developer. The developer's sales have collapsed and it has told the bank that it will miss its next two interest payments. Which risk does this primarily represent for Marlow Bank?
This is credit risk: the borrower is failing to meet its interest obligations to the bank. Credit risk concerns counterparty default. Liquidity, business and reputation risks may follow later, but the direct exposure described is the developer's non-payment.
- ACredit risk, being the risk that a counterparty fails to meet its obligationsCorrect
- BLiquidity risk, being the risk of being unable to sell an asset at fair value
- CBusiness risk, being the risk of falling sales volumes in the bank's own products
- DReputation risk, being the risk of adverse publicity about the bank
Explanation
Credit (default) risk is the chance that a borrower fails to pay interest or capital when due. Liquidity risk concerns meeting cash needs or selling assets, which is not the issue stated. Business and reputation risks are not the direct source of loss here.
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