Which type of risk does a bank incur on loans that are in the "pipeline", i.e loans that are in the process of origination but not yet originated?

Which type of risk does a bank incur on loans that are in the "pipeline", i.e loans that are in the process of origination but not yet originated?
A . Interest rate risk and credit risk
B . Interest rate risk only
C . Credit Risk only
D . The bank does not incur any risk since the loan is not yet originated

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Answer: A

Explanation:

When a bank has loans in the "pipeline," it means these loans are in the process of origination but have not yet been originated. During this period, the bank is exposed to both interest rate risk and credit risk.

Interest Rate Risk: This risk arises because changes in interest rates can affect the bank’s profitability on these loans. If interest rates change unfavorably between the time the loan terms are set and the time the loan is actually issued, the bank might end up earning less than expected. This is particularly relevant in a volatile interest rate environment.

Credit Risk: Even though the loans are not yet originated, the bank assesses the creditworthiness of the potential borrowers during the pipeline stage. If the financial condition of a borrower deteriorates before the loan is finalized, the bank faces the risk of having to deal with a higher probability of default.

These risks are inherent to the loan origination process and are present even before the loan is officially on the bank’s books.