Credit Risk
Short definition
Credit risk is expected loss if the obligor does not pay in full on time. Expected loss ≈ exposure × PD × (1 − recovery). Receivables, guarantees and unfunded lines sit in the same family.
Detailed explanation
Customer credit is run with ageing, limits and collateral. Concentration makes sector and intra-group PDs move together. Factoring transfers risk or turns it into collateral — the contract says whose PD you still hold.
Your own credit risk is the bank’s view of your PD and collateral; spread and covenants are born there. Ratings and CDS are market proxies; when they diverge, ask which one is telling a cash story.
Why it matters for the CFO
A falling DSO can be collections — or more risky dated sales. A provision is accounting for expected loss; a limit cuts the loss before it is born.
How to read it
The ageing tail is a crude PD indicator; collateral and enforcement move recovery. There is no universal “days until bad” rule.
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What to learn next
Definitions are educational. They are not investment, credit or tax advice.