What type of risk is mainly focused on the failure of a borrower to meet their financial commitments?

The focus on the failure of a borrower to meet their financial commitments defines credit risk. This type of risk arises when a borrower is unable to repay a loan or fulfill contractual obligations, leading to potential financial losses for lenders or investors. Credit risk is particularly significant in lending institutions, where the evaluation of a borrower's creditworthiness is essential for underwriting decisions.

In contrast, liquidity risk pertains to the challenges an entity may face in meeting its short-term financial obligations due to an inability to convert assets into cash without incurring significant losses. Market risk involves the potential for losses due to changes in market prices, such as interest rates, exchange rates, or equity prices. Operational risk refers to losses resulting from inadequate or failed internal processes, people, and systems, or from external events. While each of these risks can impact financial institutions and investors, credit risk is specifically concerned with the likelihood of default by a borrower.