Credit Risk Management Practice Exam

How does retail credit risk differ from corporate credit risk in terms of impact of defaults?

1. Both have similar impacts

2. Retail defaults have a larger impact

3. Corporate defaults have a larger impact

4. Retail loans are typically not evaluated for defaults

The correct answer is: Corporate defaults have a larger impact

The distinction between retail and corporate credit risk primarily lies in the scale and implications of defaults in these two areas. Corporate defaults tend to have a larger impact, and this can be attributed to several factors. Corporations often handle larger financial transactions and have broader economic ties compared to retail borrowers. A single corporate default can significantly affect the financial health of creditors, impact stock prices, and potentially lead to job losses, affecting larger segments of the economy. The ripple effect of such defaults can influence investor confidence and market stability, which is not typically the case with retail defaults. In contrast, while retail defaults do have consequences, they usually affect individuals and do not carry the same systemic risk that corporate defaults do. Defaults on personal loans or credit cards may lead to increased costs for lenders and may affect the credit scores of individuals, but these effects are usually more contained compared to the potential fallout from a corporate default. Options indicating that both have similar impacts or that retail defaults are more significant overlook the broader economic ramifications associated with corporate credit issues, which tend to involve larger sums of money, complex supply chains, and greater potential for widespread effects on employment and the economy as a whole. Additionally, suggesting that retail loans are not evaluated for defaults does not accurately reflect the rigorous assessment