Difference Between Bank Credit Risk And Bank Capital Risk

1. Explain the difference between bank credit risk and bank capital risk The credit risk is the risk that promised cash flows from loans and securities held by FIs may not be paid in full (T). Capital risk is a more broad concept. The capital risk can be defined as the risk that a company will lose their investment (FFD), which means any investment with risk will take on capital risk to the investors. Moreover, the capital risk can also be regarded as the risk that an FI may not have enough capital to offset a sudden decline in the value of its assets, which amount to the insolvency risk. The main difference between these two risks is that they caused by different situations and they are two different behaviors decide their degrees. For†¦show more content†¦Capital risk relates to the ability to absorb losses, losses can be incurred due to credit risk, liquidity risk etc. However, credit risk is the probability that the borrowers will default on paying the money back. High credit risk can bring about insolvency risk, and high insolvency risk are likely to lead to bank’s bankruptcy. Thus, capital risk will exert more direct impact on banks than credit risk. There are three main types of individual consumer lending, which are housing loan (residential mortgage loan), revolving loans and fixed term personal loans. According to the data definition of the Bankscope, residential mortgage loan is a loan that secured by residential property. A loan provided by credit cards can be regarded as a revolving loan. People who have a revolving loan ca n draw and repay up to an amount of money in the life of the loan contract. In contract, fixed-term personal loans is credit that cannot be used again after payment. Once finished all of the payment, the borrower would no longer owe money and cannot draw any money. Purpose for purchasing is the main difference between housing loan and revolving loan. Housing loans have specific purchasing purpose, borrowers only can use the loan to purchase their houses. Nevertheless, people with revolving loan, for example the credit card, are able to purchase anything within the line of credit. The second difference is that residential mortgage loan must need