What type of risk does a bank undertake when it fears a borrower might default on a loan?Liquidity RiskOperational RiskCredit RiskMarket Risk

Break Down the Problem

1. Identify the terms: Understanding the types of risks mentioned (Liquidity Risk, Operational Risk, Credit Risk, Market Risk).
2. Define default: Recognize that default refers to a borrower's failure to meet the obligations of a loan.

Relevant Concepts

1. Credit Risk: This is the risk that a borrower may not repay a loan according to the agreed terms. It is specifically associated with the potential for financial loss due to the borrower's inability to fulfill contractual obligations.

Analysis and Detail

1. Liquidity Risk: This involves the bank’s inability to meet short-term financial obligations, which is not directly related to borrowers defaulting.
2. Operational Risk: This encompasses failures in internal processes, people, or systems, rather than borrower default issues.
3. Market Risk: This refers to the risks associated with market fluctuations affecting the bank's investments but does not directly involve borrower default.

The primary concern when a borrower might default is the potential for loss of income and the need to cover the debts incurred by that borrower.

Verify and Summarize

After analyzing the risks, it is evident that the type of risk the bank primarily experiences when fearing a borrower might default is Credit Risk.

Final Answer

The type of risk a bank undertakes when it fears a borrower might default on a loan is Credit Risk.