Counterparty Risk

Credit or counterparty risk is the risk that a borrower will default on their debt. If that occurs, the lender would like recourse to the borrower to recover that debt. The simplest way to do this is by using collateral. Collateralization is a fundamental tool used throughout the traditional finance space to minimize or mitigate credit risk. Collateralization occurs when a borrower pledges an asset as recourse to the lender in the event of default on that loan.