There are two types of credit risk banks are exposed to. The first is lending credit risk. Risk a borrower fails to repay part or all of the loan they have taken out from a bank or on a bond the company has issued that the bank may have purchased. This can also be referred to as default risk. The second form of credit risk can be described as counterparty credit risk, or just counterparty risk. This is the risk of potential losses that would arise for one party in a financial transaction. This typically will occur in relation to an over-the-counter derivative type product. These are entered into directly between two counterparties where the party losing from the derivative may fail to fulfill their necessary obligations under that contract. This means the other side won't make a gain that they were expecting, or for security financing transactions such as repos where one counterparty may fail to pay the money to repurchase the underlying securities at the end of the transaction. Counterparty risk can be further broken down into two component parts. First is pre-settlement risk. This captures the risk that a counterparty goes into bankruptcy prior to the expiration date in the contract, meaning that even though one counterparty in the transaction was expecting to make a gain in the future since the other counterparty has gone bankrupt they will not be in existence in the future to be able to make any required future settlements on the transaction. Pre-settlement risk can be quantified as the cost of putting a replacement contract in place with another market participant during the life of the derivative contract. Settlement risk is the other element of counterparty risk and relates to the risk that a counterparty defaults on obligations during the course of the contract's life, such as a required payment on an interest rate swap reset date. The main difference between settlement and pre-settlement risk the amounts owed under pre-settlement risk are not known and can only be estimated since they're based on the best estimate today of what the obligations may be in the future.