Repeated calls have been made for enterprises to make more use of medium and long-term financing, which requires banks to develop more detailed knowledge of borrowers, to make accurate assessments of their earnings prospects, and consider the shocks that they could be exposed to as a result of adverse developments in the economy or the financial market.
However, due to the information asymmetry, their assessment cannot always be correct, and the credit standing of the lender or the receiver of investment may decline due to various factors. Therefore, a major risk financial institutions facing is the lender’s default risk, i.e., credit risk.