counterparty risk
The risk that the other party in a financial transaction will default on their obligations before the deal is settled.
Example
“Lehman Brothers' collapse in 2008 created massive counterparty risk — nobody knew who else would fail.”
Memory Tip
COUNTERPARTY risk = the other side of your deal might not pay. They're the counter to your party.
Why It Matters
Counterparty risk matters because it affects the safety of your money in everyday financial decisions. When you deposit funds in a bank, lend money to a friend, or invest in bonds, you are exposed to the risk that the other party may not be able to return your money when promised.
Common Misconception
Many people assume that counterparty risk only applies to large financial institutions or complex investments. In reality, counterparty risk exists in simple everyday situations like leaving money with a friend, using a small local bank, or buying gift cards from struggling retailers.
In Practice
Imagine you deposit 10000 dollars in a regional bank that later faces financial trouble and fails before your deposits are fully insured. If the bank only has 50 million dollars in assets but 80 million dollars in customer deposits, you might lose money because the bank cannot pay back all obligations, making you a victim of counterparty risk.
Etymology
COUNTERPARTY (the other side of a transaction) RISK (potential for loss). RISK from the COUNTERPARTY failing.
Common Misspellings
Protect your assets with the right insurance
Related Terms
More in risk management
Other risk management terms you should know
See Also
Need help with spelling?
Instant spelling checker with dialect variants for 2,000+ words.