What term describes the total amount of credit that is at risk in the event of default by a borrower?

The term that describes the total amount of credit that is at risk in the event of default by a borrower is referred to as "Exposure." In financial terms, exposure indicates the potential loss that could be incurred if a borrower fails to meet their obligations. This encompasses not only the principal amount that is lent to the borrower but also includes any interest and fees that might be due. Understanding exposure is crucial for financial institutions as it helps assess the risk associated with lending and informs risk management strategies.

In contrast, credit limit indicates the maximum amount that a borrower is permitted to utilize on a credit account, which does not encapsulate the risk aspect. Loan amount specifically refers to the total sum that has been disbursed to the borrower and does not account for potential losses due to default. Collateral value involves the assets pledged by the borrower to secure the loan, primarily used as a backup for recourse, but it doesn’t capture the total credit risk the lender faces. Hence, exposure is the most accurate term reflecting the total credit risk attributable to a borrower's default.