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Risk Management Analysis of UK Banks

Sample on Risk Management Analysis of UK Banks

ABSTRACT

Globalization has not only affected the private sectors organizations but also the banking sector and institutions and these institutions are facing tough time. Management of risk is the crucial actor for the banking institutions looking at the globalization and banking operations going global. So, management of risk is one of the crucial factors which need to be studied by every banking institution. Risk management can be defined as the process in which the identification, evaluation and assessing and the prioritizing of the risks of all kinds and uncertainties of the objectives were taken place in the organizations. There is a great significance of the risk management in the banking institutions. The relevance is that it helps the banks in monitoring and controlling the events due to which the project failure happens and provides the bank with a setback for their regular growth and profitability.

The dissertation below includes the case study method, as it will help in analyzing the financial statements of Barclays bank and HSBC and by using these statements the comparative analysis would be done. The dissertation also includes the literature review and by using the literature review method and case study method, the results will be derived, which will help in analyzing what measures can be adopted by the banks in order to minimize the risk levels in the banking institutions in United Kingdom. The research also includes the survey method for the purpose of analyzing the risk management activities performed by the banking institutions across UK. These measures will be discussed in brief in the coming chapters of the dissertations. Following the analysis the conclusion has been drawn, answering the research questions which will be explained by throwing light on the how banks will help to minimize the risk levels that they faces in their business processing’s. Finally, the recommendations are drawn, in context with HSBC and Barclays are required for coping with the financial crisis that can be occurred at any point of time.

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1: INTRODUCTION

Research Statement

The research is based on the risk management Analysis of UK banks. It also analyzes the risk level in the commercial banks in United Kingdom along with the major issues circumventing the bank risk management.

Background and Context

The risk management can be defined as the process of identification of the risks and also the assessment and enumeration of the level of business risks (Ernst and Young, 2010). In concern to this, an assessment of the process of qualification and the quantification of particular type of business jeopardizes is done. Risk management involves the simple process of employing the financial and human resources to monitor and mitigate the same (Bank of England, 2010). As per the international standards set at an organizational level, the inclusion of the risk management in the business operations are vital pillars which form part of process as it involves the data retrieved from the risk management process involved in decision making. This process should be flexible enough to embrace changes and should be enhanced regularly keeping it in line with the prevailing circumstances of the organization (Bank of England, 2010). In the uncertain economic environment, it emerged from the legal obligations set forth by the authorities. Other factors affecting the risk taking will be changing nature of the business and the rivals or competitors. In order to subsidize these it, several business bodies have come with the strategies. (Gay, 2007).


The advanced organizations find it suitable and competent to develop their own strategies of risk management and control. The ISO standards also provide certain procedures and policies which can be utilized by the organizations in order to mitigate the risks originated (Ernst and Young, 2010). Due to the uncertainties, which has been bought by the global economic recession, it is highly vital for the banking organizations to develop and implement the policies that will aid the organizations to cope up with it and navigate safely through the liquidity economy (Bank of England, 2010). However, the process of risk management incurs high amount of cost to the organization due to the implementation of lofty range of personnel and other resources.. Application of the level and the type of the risk management policy by the banking institutions vary with the range of the activities that has been measured. Some of the basic policies include, reduction of the negative impacts of the risks faced, accepting some parts or all the parts , mitigating them and also passing them to other parties (Bank of England, 2010).

Looking at the political analysis of the banking industry of United Kingdom, it has been observed that the industry is facing issues where the risk factor is high. The key challenges faced by the banks in this country includes the uncertainty in concern to the rules and regulations that the government will implement on the procedures and policies of the financial institutions in order to control them (Gay, 2007). However, it can also be said that these banks are the symbols of success for the other financial institutions. This can be well justified by showing the presence of the world’s top banks such as the Barclay’s and HSBC bank. These financial institutions have a high market share in the industry and also are sound financially. However, the global economic recession and the slowdown have impacted the banks a lot and left them in the awkward situations with regard to their financial positions. These banks are now trying to develop their portfolios and review their financial positions in the current scenario (Bank of England, 2010).

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The global economic recession has impacted the liquidity of the world’s global economies with a high margin. This unprecented uncertainty has increased the level of risks and awareness in many of the financial institutions. In context with the present scenario, several UK banks have to pass through the risk assessment procedures. This shows the attitude of these financial institutions exhibits a synopsis of their growth / change in each year. (HSBC, 2010). Banking organizations majorly focus on risk management and this issue circumvents top management including top board of directors and CEO’s (HSBC, 2010). Many financial organizations have incorporated strict staff and policies for its proper management. In this concern, various risks associated with such organizations are related to market, credit, operational and reputational risks. Rational financial organizations must develop policies after a proper analysis of the goals, strategy, customer requirements and the vision of the organization (HSBC, 2010). So, a special department is being arranged which is set with the tasks and responsibilities of identification and analysis of all forms of risks that the organizations may face in their day to day business activities. Every organization needs to analyze the risks timely and ensure that it does not exceed the set parameters of the organization. Each of the related parties to the banks, need to ensure that they are meeting the set criteria (Bank of England, 2010).

With the political analysis of the banking institutions and industry in the United Kingdom it shows that how the government and the financial institutions have been associates. The government has been making regulations that favor the banking and other financial institutions. Also, certain policies are framed that have an impact on the working of the financial institutions. But these rules and regulations set by the government are highly uncertain in the banking industry because of which the top management of multinational banking sectors comes up with different ways of predicting what rules they should expect and hence tune with the capital allocation processes to suit the expected regulations. This process is highly tiresome and complicated and also consumes a lot of time of the company executives (Ernst and Young, 2010). The economic uncertainties and the high level of the economic liquidity have increased the risks in the banks (HSBC, 2010). Therefore, the banking institutions should take proper measures to ensure that it should be minimized and mitigated by any means (Loeb, 2009). These efforts to subsidize the risks increased costs related to investment on the employees with high risk management and forecasting skills as well. Banks also takes initiatives of complementing the processes with advanced technology so as to make it more and more effective (High beam, 2010). A recent research or study conducted by Ernst and Young shows that the cost of risk management has been expected to rise by 80 % margin and will reduce by 0 % margin. Only the remaining 20 % of the costs are expected to remain constant. This displayed that the process of risk management is among the key management processes in the United Kingdom banking institutions (Ernst and Young, 2010).

Research question

From the above analysis , it has been analyzed that the level of risk in commercial banks is becoming a very serious issue which needs the management consideration. It is vital to analyze and determine the key issues surrounding in such organizations. So, these research questions have been kept as the base in this paper and framed accordingly:

1. What are the main factors responsible for the increased risk awareness in the United Kingdom Banks?
2. What are the benefits a bank gets when they manage the risks?
3. Are the risk management principles adopted by the banks in United Kingdom are disclosed by them? What are the vital factors influencing the risks in United Kingdom Banks?

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Aims & Objectives

Aims: The prime aim of the research is to assist the banks to improvise their risk management practices and adopt methods to steer successfully in the current uncertain global economy. The research also aimed at the establishment of the new risk management methods that can be utilized by the banks to minimize the level of risks faced by them. It is also aimed to establish the teams or professionals that will become responsible in handling the risk management practices and processes.

Objectives: The following are the main objectives of the research:

1. To identify risk management methods utilized by the United Kingdom Banks and mitigate them;
2. To set up the parties accountable for the risk management in the banks in UK.
3. To establish measures taken by banks to minimize or reduce the risk occurred due to the global economic recession.

Rationale

The main purpose of undertaking this research study is analyzing the risk prevailing in the commercial banks in UK. This research is carried to reveal the information While carrying this research different standards are also kept in consideration. In short, the rationale behind conducting this research is to understand about the different economic factors like recession in which risk level is high. This research will also help in understanding the topic for conducting further work into it.

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