thommo77

Settlement Risk --> Risk that counterparty will fail to deliver the terms of a contract.
Credit risk --> default risk, downgrade risk, credit spread risk

thommo77

I think settlement risk comprises both credit risk and liquidity risk ( but with a focus on liquidity ) .

Credit event ALONE by itself denotes that one party is insolvent and is not likely to ever be able to settle.

In settlement risk event , they may miss a payment or two but are otherwise solvent.

settlement risk event can happen due to liquidity without credit event happening , due to temporary liquidity crisis . But can happen due to other horrible or shady circumstances as well:

Schweser points to Hertstatt when a German bank was told to stop business at the end of the current day , but had already taken in payments from various counterparties. At the end of the day , these counterparties did not get their dues in foreign currencies or whatever instrument they had paid for ( cash flows ) .They became fully exposed even when they were almost fully hedged against this bank on their books.

This kind of problem is impossible for a default model to capture

Morning : full faith , Evening : Fully busted. i.e. settlement risk event occurred.