question archive A bank has set aside almost 3% as a loan loss reserve
A bank has set aside almost 3% as a loan loss reserve
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A bank has set aside almost 3% as a loan loss reserve. The resulting loss of income is $26.750.000. This is an example of what kind of risk?
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Credit risk
Credit risk is the biggest risk for banks. It occurs when borrowers or counterparties fail to meet contractual obligations. An example is when borrowers default on a principal or interest payment of a loan. Defaults can occur on mortgages, credit cards, and fixed income securities. Failure to meet obligational contracts can also occur in areas such as derivatives and guarantees provided
A contra account that is used to fund EXPECTED CREDIT LOSSES. Reserves are established by deducting required amounts from operating revenues or current income, and are used when a COUNTERPARTY ceases to perform on a contractual obligation, such as a LOAN, BOND, payable, or DERIVATIVE.
