Credit risk is the risk of potential loss resulting from the failure of the clients to meet their obligations. This can be due to matters directly linked to the clients such as business or management crisis or political unrest in the client’s country. Another factor affecting this risk is the failure in the settlement process which means that UBS meets the obligations in a foreign exchange transaction whereas the client fails to honor the commitment.
There are many sources of credit risk for banks such as loans, contingent liabilities, derivatives such as forwards or options contracts and borrowing and lending transactions on securities. Like other banks UBS also faces these types of credit risks and especially after the bank had financed many subprime loans. The credit risk on all such types of loans and commitments was quite high as the bubble of subprime burst in 2007 and 2008 many of UBS’s clients failed to meet their obligations on due time. The risk is further elevated when much of the clients are based in the same geographical and economical areas which would mean that if an economic crisis hits that area all these clients would be affected. Although UBS has implemented measures to control credit risk the amount of losses due to failure of the clients in meeting commitments is quite high.
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