How is credit risk related to the concepts of adverse select

How is credit risk related to the concepts of adverse selection and moral hazard?

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Solution

A credit risk is the risk of default on a debt that may arise from a borrower failing to make required payments.

Eg: when a consumer fails to pay dues on loan taken by him.

Which also includes loss of principle and interest amounts, disturbed cash flows and increase in expenditure for recovering the amount.

ADVERSE SELECTION

When buyers and sellers have access to different information , traders with better private information about the quality of a product will selectively participate in trades which benefit them the most .

adverse selection, which is a risk exposure that exists before the money is lent or invested.

Moral hazard is the risk that the receiver of funds will not use the money as was intended or they may take unnecessary risks or not be vigilant in reducing risk.