What drives credit risk
A customer's likelihood of default, the amount exposed, and the loss if default occurs are different factors. A small high-risk balance can create less potential loss than a large lower-risk balance.
A simplified expected-loss illustration is probability of default × exposure at default × loss given default. Actual accounting and regulatory calculations require their own assumptions, time horizons, and methodologies.
Assessing an account
Teams may review payment history, financial statements, concentration, existing obligations, disputes, and appropriately obtained credit information. Record the data source and assessment date. A score is an estimate, not proof that a customer will fail to pay.
Applying the assessment
Use approved credit policies to review limits, terms, and follow-up priorities. Separate inability to pay from an invoice error or unresolved service dispute. Offer only authorized arrangements and route exceptions for review.
Hypothetical example: An overdue balance with a documented billing dispute needs investigation even if the account has a high risk score. More reminders alone may not resolve it.
Technical reference: OSFI credit risk framework. Its regulatory methodology is distinct from the simplified illustration above.