Banking Practice Exam 2025 – 400 Free Practice Questions to Pass the Exam

Credit risk is the primary risk associated with lending because it directly pertains to the likelihood that a borrower will default on their loan obligations. When a financial institution lends money, it is essentially taking a risk that the borrower may not repay the principal or the interest as agreed. This risk is paramount for lenders since defaults can lead to significant financial losses and can affect the overall stability of the lending institution.

In the context of lending, credit risk encompasses various factors, including the borrower's creditworthiness, their repayment history, and the economic conditions that may affect their ability to repay the loan. Lenders typically assess credit risk through credit scoring and thorough evaluation of financial statements before approval of a loan.

While interest rate risk, foreign exchange risk, and liquidity risk are all important considerations in banking and finance, they are not as directly connected to the act of lending as credit risk. Interest rate risk deals with fluctuations in interest rates affecting the revaluation of loans and deposits. Foreign exchange risk concerns the potential loss from currency fluctuations for transactions involving multiple currencies. Liquidity risk refers to the potential inability to meet short-term financial obligations due to the inability to convert assets into cash quickly. Although these risks are relevant in the broader context of banking, they do not encapsulate the core