Cost of risk
What is cost of risk for a bank, and how is it calculated?
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BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
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Cost of risk is a bank's credit impairment charge for a period divided by its average loans, usually shown in basis points: a charge of US$60m on average loans of US$40bn is 15 basis points. It is how investors and the bank itself compare credit losses across years and across lenders, and it moves before write-offs do, because expected credit loss accounting books the charge when risk rises rather than when a loan fails. A low figure in a good year describes the past, not the book's future.
BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.
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