News & Resources

Counterparty credit risk named underrated hazard

May 10, 2013 Walt Wojciechowski

Global management consultant, Aon, recently released its annual risk management survey which highlighted a decline in readiness across the world last year. On average, the readiness levels for the firm's top 10 risks dropped 7 percent from 2011.

Although counterparty credit risk readiness, the worry that another party will fail to make payments on debts or loans, was ranked outside of the top 10, it was listed as the seventh most significant danger in Europe. This is most likely due to a lack of confidence in financial institutions across the continent in the wake of economic disasters in Greece and Cyprus.

Despite credit readiness being significantly higher than other potential financial hazards, Aon said that it may be misleading. Experts with the company stated despite counterparty credit risk being ranked at 20, managers should increase attention in this field.

Alternative credit and loan providers should stay vigilante and prepare for possible payment defaults, as Aon suggests. In order to do so, lenders need to have contingency plans in place in the event borrowers do in fact fail to pay the full amount they owe as to mitigate the financial loss they might experience. This applies to lending firms worldwide, not just in Europe.

"As part of the board's responsibility to endorse and monitor strategy, directors should gain an intimate understanding of the major strategic risks, possible scenarios and how the appropriate strategy allows the exploration of uncertainties and mitigation of strategic risks," said Javier Gimeno, an Aon official.

By closely inspecting commercial credit reports, lenders can better asses the financial standing of the enterprises their company is conducting business with.