Distinguish between Risk Transfer and Risk Mitigation

Risk transfer and risk mitigation are two different strategies for managing potential risks, but they address risk in distinct ways. Risk mitigation focuses on reducing the likelihood or impact of a risk, for example, a bank transfers credit risk by selling loans or purchasing credit default swaps. While the risk is transferred, the bank may still retain some residual or reputational risk. while risk transfer shifts the financial burden of a potential loss to a third party. In essence, mitigation aims to control the risk internally, whereas transfer seeks to externalize it. In banking, this includes tight credit appraisal, diversification, collateral requirements, internal limits, and strong operational controls.