Market risk vs credit risk: what is the difference?

The difference is the cause of the loss: market risk comes from prices, credit risk from a party that does not pay. The table compares credit risk vs market risk as the Basel Framework and the CRR treat them.

In banking, market risk is the risk that positions lose value because market prices move. The Basel Framework lists the types of market risk that need capital: default risk, interest rate risk, credit spread risk, equity risk, foreign exchange risk and commodities risk for trading book instruments, and foreign exchange and commodities risk for banking book instruments (MAR11.1). These are the market risk factors that the capital rules cover. Market risk in finance outside banks has the same causes: a fund that holds shares carries equity risk.

An example of market risk: a euro bank holds US dollar bonds in its trading book. If the dollar falls against the euro, the position loses value in euros, even when the issuer pays every coupon. If the issuer defaults, that loss is credit risk.

Market risk is measured with a standardized approach or, with supervisory approval, an internal model. The standardized approach of the Basel Framework is built on sensitivities to each risk factor, plus a default risk charge. Under the internal models approach, a bank needs approval for each trading desk (MAR30.4) and calculates expected shortfall at a "97.5th percentile, one-tailed confidence level" (MAR33.3).

The result is the market risk capital charge. Article 92(3) CRR adds it to the total risk exposure amount, next to the risk-weighted exposure amounts (RWA) for credit risk. Inside the bank, market risk management works with limits: BaFin's MaRisk says no trade with market price risk may be closed without a market risk limit (BTR 2.1). For credit risk, no loan may be granted without a limit for the borrower (BTR 1).

Interest rate risk and credit spread risk are types of market risk when the position sits in the trading book (MAR11.1). Market risk vs interest rate risk is therefore a question of scope: interest rate risk is one of several market risk factors. In the banking book, MaRisk treats it in module BTR 2.3, "Marktpreisrisiken des Anlagebuches (einschließlich Zinsänderungsrisiken)".

Credit risk vs interest rate risk: a fixed-rate loan loses value when rates rise, even if the borrower pays in full. That loss is interest rate risk. The loss when the borrower stops paying is credit risk. Derivatives combine the two: the amount a counterparty owes moves with market prices, which the Basel Framework calls a "bilateral risk of loss" (CRE51.2). That is counterparty risk.

A bank's crypto-asset holding carries both risks. Article 5a(3) CRR, inserted by Regulation (EU) 2024/1623, defines a crypto-asset exposure as an item "that gives rise to credit risk, counterparty credit risk, market risk, operational risk or liquidity risk". The Basel standard on cryptoassets, in effect since January 1, 2026, has separate capital rules for credit risk and market risk on Group 1 cryptoassets and a 1,250% risk weight for Group 2b (SCO60).

In Germany and Austria the CRR applies directly, and the ECB supervises significant banks. BaFin's MaRisk circular 06/2024 (BA) of May 29, 2024 lists Adressenausfallrisiken and Marktpreisrisiken among the risks a bank must at least treat as material (AT 2.2). In Austria, the FMA and the OeNB supervise the less significant banks (OeNB).

Investors in the euro area hedge interest rate risk, a market risk, with futures on German federal securities. These futures trade on Eurex, the derivatives exchange of Deutsche Börse Group run by Eurex Frankfurt AG (Finanzagentur, Eurex). The Euro-Bund future has a contract value of €100,000 and refers to bonds with 8.5 to 10.5 years of remaining term (Eurex).

Switzerland is outside the EU, so the CRR does not apply there. Since January 1, 2025, FINMA's Ordinance on the Credit Risks of Banks and Securities Firms (CreO-FINMA) and its Ordinance on the Market Risks (MarO-FINMA) set the technical rules. MarO-FINMA covers the standardized approach, the model approach and a simplified standardized approach (FINMA, March 27, 2024). This page gives no legal advice.