Which type of risk is associated with the possibility of a loss due to a borrower’s failure to repay a loan?

The type of risk associated with the possibility of a loss due to a borrower’s failure to repay a loan is credit risk. This risk specifically focuses on the likelihood that a borrower will default on their obligations, affecting the lender's financial situation. When a borrower fails to make payments, it can lead to significant financial losses for the lender, making credit risk a critical consideration in lending and investment decisions.

Operational risk, on the other hand, pertains to losses resulting from inadequate or failed internal processes, systems, or people, unrelated to borrower performance. Market risk involves the potential for financial losses due to fluctuations in market prices or interest rates, rather than borrower behavior. Liquidity risk refers to the difficulty of selling an asset without incurring a loss, which is also distinct from the risk associated with borrowing. Understanding credit risk is essential for financial institutions to manage their portfolios and make informed lending decisions.