[Credit Risk in Banking and Finance]

By

Acknowledgement

I would first like to express my gratitude for my research supervisor, colleagues, and peers and family whose immense and constant support has been a source of continuous guidance and inspiration.

DECLARATION

I [type your full first names & surname here], declare that the following dissertation/thesis and its entire content has been an individual, unaided effort and has not been submitted or published before. Furthermore, it reflects my opinion and take on the topic and is does not represent the opinion of the University.

Table of Contents

ACKNOWLEDGEMENTII

DECLARATIONIII

CHAPTER 1: INTRODUCTION1

Significance2

Objective2

Research Question/Hypothesis2

CHAPTER 2: LITERATURE REVIEW3

Risk management5

On Risk Capital5

Credit Risk6

The operational risk8

CHAPTER 3: METHODOLOGY10

Search Technique11

Literature Search12

CHAPTER 4: ANTICIPATED RESULT13

CHAPTER 5: CONCLUSION14

REFERENCES15

CHAPTER 1: INTRODUCTION

The current financial crisis can be attributed to the U.K. housing bubble which began in late 1990 and continued until 2006(Horiuchi 2008 1). Housing prices increased significantly during this period without any fundamental change in the factors that usually cause an upward shift in prices. Borrowers and lenders were of the view that housing prices continue to rise indefinitely. Nobody was looking at the fundamentals as investors were blinded by a phenomenon known as "information cascade". Despite the market downturn before and after the NASDAQ market in March 2000, no one seemed concerned that the housing bubble could burst soon at some point in time, although it was difficult to understand that house prices were too high for justified. The speculatively driven by low interest rates over a long period and a lax approach by the bankers and mortgage companies led to a boom in subprime mortgages (Homoud 2004 71).

The target federal funds rate remains very low at 1 percent between June 2003 and June 2004. The long period of low interest rates prompted investors to invest in higher yielding products. This resulted in the widespread use of derivatives, such as mortgage-backed securities (MBS). Subprime borrowers were given adjustable rate mortgages especially during the period of low interest rates (Hobson 2006 15). Borrowers, who knew that the rates ultimately go in the future, chose to ignore this fact, either because they quite understand the concept of adjustable rate or thought it would be able to refinance at a fixed rate in the future. Loan originators are not concerned with the quality of the loan or the ability of borrowers to make mortgage payments.

Significance

The purpose of this study is to validate the concern that banks' increasing involvement in securitization activity of banks restricting lending, and the degree of credit risk tolerance. Theoretical claim that securitization reduces the credit risk; therefore, reduce the banks credit risk aversion. Subsequently, the banks would be encouraged to increase its percentage of assets subject to credit risk activities, which is providing economic sectors. However, banking statistics dictates that lending banks is declining, while banks' securitization activities are increasing.

Objective

This study will be an empirical exploration of how the participation of banks in securitization activity affects their financing activity. In particular, this study will investigate whether securitization encourages complementarily "financial activity is to reduce ...