RISK MANAGEMENT

Risk Management in Banking

By

Acknowledgement

I am thankful to my family, friends, colleagues and my instructor as without their support and guidance, this project would not have been completed.

Declaration

I declare that this project shows my own work developed by an analysis of the secondary research and primary research study. Moreover, this study has not been published before.

Abstract

The global financial crisis of 2007/2008 has imposed significant challenges on the banking system. It is becoming difficult for the financial institutions to combat the risks that have been imposed by the credit crunch. Every investment and financing decision as well as operational activities undertaking by a bank under uncertain conditions is associated with some form of risk. Thus, the purpose of this paper is to examine the various risks that are faced by the UK banking sector and to determine effective strategies that will facilitate financial institutions in mitigating these risks. It is imperative for the government to develop efficient monetary policy to deal with the risks that confront the banking community. The financial crisis has been as a result of numerous factors that include low real interest rates, a search for yield, apparent excess liquidity and a misplaced faith in financial innovation. The bankers in the UK financial industry have made an astonishing mess of the financial system. Thus, it is essential to ensure that banks have formulated strategies to combat the risks that are likely to result in financial crisis in the future.

ACKNOWLEDGEMENT1

DECLARATION2

ABSTRACT3

4

CHAPTER 1: INTRODUCTION5

1.1 Background:5

1.2 Rationale for this study6

1.3 Research Aim7

1.4 Research Objectives7

1.5 Research Questions8

CHAPTER 2: LITERATURE REVIEW9

2.1 Types of Risks9

2.1.1 Credit Risk9

2.1.1.1 Practices for Managing Credit Risk10

2.1.2 Market Risk11

2.1.2.1 Liquidity Risk12

2.1.2.2 Interest Rate Risk12

2.1.3 Operational Risk12

2.1.3.1 Transaction Processing Risk13

2.1.3.2 Compliance Risk13

2.1.3.3 Legal Risk13

2.1.3.4 Security Risk13

2.1.3.5 Tax Risk14

2.2 Measuring Risk14

2.2.2 Measuring Market Risk15

2.3 Basel Committee on Banking Supervision:15

CHAPTER 3: RESEARCH METHODOLOGY17

3.1 Type of investigation:17

3.2 Data collection method:17

3.3 Sampling method:17

3.4 Accessibility issues17

3.5 Ethical issues17

3.6 Data analysis plan18

3.7 Research limitations18

CHAPTER 1: INTRODUCTION

1.1 Background:

Transactions that involve money always have some sort of risk associated with it. The most important place for money is the financial institution. Banks faced various risks; the most common risks that are faced by the banks include uncertainty with maintaining accounts, issuing loans and collecting debts (Neal, 1996). It is important for banks to govern financial activities in an efficient and effective manner, as banks are likely to become bankrupt as a result of not being able to manage their operations effectively (Neal, 1996).

Financial institutions face various risks; these risks include credit risk, market risk which can be further classified as interest rate risk and liquidity risk, and operational risk. These risks create a significant impact on the performance of the banks. As a result of these risks associated with banking operations, they are likely to face loss of market value, loss of reserves and loss of stakeholders' confidence (Jackson & Perraudin, 1999).

Therefore, banks are required to manage these risks efficiently to avoid being bankrupt and resulting in a situation such as the financial ...