LO 33.2: Explain the differences between retail credit risk and corporate credit risk.

LO 33.2: Explain the differences between retail credit risk and corporate credit risk.
There are several features that distinguish retail credit risk from corporate credit risk. As mentioned earlier, retail credit exposures are relatively small as components of larger portfolios such that a default by any one customer will not present a serious threat to a lending institution. A commercial credit portfolio often consists of large exposures to corporations that can have a significant impact on their industry and the economy overall.
Due to the inherent diversification of a retail credit portfolio and its behavior in normal markets, estimating the default percentage allows a bank to effectively treat this loss as a cost of doing business and to factor it into the prices it charges its customers. A commercial credit portfolio is subjected to the risk that its losses may exceed the expected threshold, which could have a crippling effect on the bank.
Banks will often have time to take preemptive actions to reduce retail credit risk as a result of changes in customer behavior signaling a potential rise in defaults. These preemptive actions may include marketing to lower risk customers and increasing interest rates for higher risk customers. Commercial credit portfolios typically dont offer these signals, as problems might not become known until it is too late to correct them.
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