What is Wrong way risk?

In Finance, a Wrong way risk occurs when credit exposure to a counterparty is negatively correlated with the credit quality of that counterparty. In other words, the more a party gains on a trade, the more likely it is for the counterparty to default. It is a source of concerns for banks and regulators, as it increases the overall counterparty credit risk.

It is opposed to Right way risk , which occurs when one party's payment obligations are positively correlated to the same party's credit worthiness and thus reduces the overall counterparty credit risk.