Non-Default Losses refer to financial losses incurred by an entity that are not a direct consequence of a counterparty failing to meet its contractual obligations. Instead, these losses stem from other systemic, operational, or market events that disrupt normal business functions or asset values.
Mechanism
These losses manifest from various sources such as cybersecurity breaches, technical infrastructure failures, legal and regulatory penalties, fraud, or unforeseen market disruptions impacting specific assets or trading systems. They occur independently of whether a borrower defaults on a loan or a trading partner fulfills their side of a contract. The loss originates from internal or external non-credit events.
Methodology
The methodology for managing non-default losses involves comprehensive operational risk assessment, robust cybersecurity frameworks, stringent internal controls, and effective business continuity planning. It necessitates identifying potential points of failure, implementing preventative measures, and establishing clear protocols for incident response and recovery to mitigate financial impact.
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