Credit Risk for Major British Banking Groups

By

[Name of the Subject]

Acknowledgement

I would like to thank to the God who helped me in successfully completing my thesis. I am also thankful to my professor, who has assisted me throughout the preparation of the dissertation. I would also like to pay my gratitude to my parents who encouraged me throughout my education period. Abstract

Credit risk is considered as a major risk which is inherited in a bank's banking and trading activities. It is imperative of banks to ensure that they manage this kind of risk efficiently. If banks fail to manage credit risk they will get into great trouble or even get bankrupt. However, to manage credit risk is not a simple task, banks are required to have comprehensive consideration and practices which will allow them to identify, measure, control and minimize credit risk. The purpose of this research is to examine the credit risk management practices of major British banks. The researcher will conduct quantitative research on all major British Banking Group members. For the purpose of comparing techniques and practices of sample banks the researcher will use Basel (1999, 20000 requirements. These requirements are also used by banks for credit risk management.

Table of Content

Acknowledgement2

Abstract3

CHAPTER 1: INTRODUCTION5

Defining Credit Risk5

Purpose Statement6

CHAPTER 2: LITERATURE REVIEW7

2.1 Credit Risk to UK Banking System7

2.2 Types of Credit Risk7

2.2.1 Default risk8

2.2.3 Counterparty Pre-Settlement Risk8

2.2.4 Counterparty Settlement Risk9

2.2.5 Country or Sovereign Risk10

2.3 Identifying Credit Risk Exposure in Banks10

2.3.1 On-Balance Sheet Exposure11

2.3.2 Off-Balance Sheet Exposure12

2.4 Principles of Credit Risk Management in Banking15

Credit Risk Management Objectives15

Credit Risk Measurement18

Credit Risk Ratings18

Credit Scoring System19

Credit Risk Modeling20

Credit Risk Mitigation20

CHAPTER 3: RESEARCH METHODOLOGY25

Research Aims and Objectives25

Research Design25

Research Sample26

Sample Selection26

Research Description26

Quantitative Data26

Qualitative Data28

Credit Risk Disclosure29

Research Limitations30

CHAPTER 4: RESEARCH FINDINGS31

Credit Risk Mitigation Practices at Barclays and Royal Bank of Scotland (RBS)31

Credit Granting33

Credit Risk Models33

Basel Regulations36

Credit Risk Management Practices at Bradford & Bingley and Northern Rock38

Basel Regulations and Evaluations of Sample Banks40

CHAPTER 5: CONCLUSION AND RECOMMENDATIONS41

References43

Appendix A46

Appendix B47

CHAPTER 1: INTRODUCTION

Defining Credit Risk

Credit is defined as the risk of loss by an individual or an enterprise that have lent money to other party, if the other party fails to pay the specified amount in the given time period. The credit that is extended to other party can either be in the form of loans or accounts receivable. According to Colquitt (2007, p. 1) “Credit risk arises whenever a lender is exposed it loss from a borrower, counterparty, or an obligor who fails to honor their debt obligations as they have agreed and contracted”. Credit risk is inherited in all business activities, lenders who extend credits in the form of loans, trading activities and capital markets; they all will be exposed to credit risk (Abdus, 2004). The most evident credit loss may occur as a result of inability of the borrower to pay the interest on loans or repay the principal amount. Credit risk may also arise due to the performance of counterparties that are involved in contractual agreement for instance, derivatives. Therefore, it is significant for the lenders to ...