Consider two local banks. Bank A has 77 loans outstanding, each for $1 million, that it expects will be repaid today. Each loan has a 5% probability of default, in which case the bank is not repaid anything. The chance of default is independent across all the loans. Bank B has only one loan of $77 million outstanding that it also expects will be repaid today. It also has a 5% probability of not being repaid. Explain the difference between the types of risk each bank faces. Which bank faces less risk? Why? has 77 different loans that each has its own independent chance of default, while has a single loan. This means that will either earn either $0 or $77 million, while will likely earn an amount slightly less than $77 million since it is likely that will default. This means that faces less risk because it is much less likely that earns no money from its loan(s)