Report for The Performance Management of Dog’s Habitat make corrections based on feed back comments AN ANALYSIS OF THE RISK MANAGEMENT FRAMEWORK WITHIN THE

Report for The Performance Management of Dog’s Habitat make corrections based on feed back comments AN ANALYSIS OF THE RISK MANAGEMENT FRAMEWORK WITHIN THE
BANKING SECTOR: “A CASE STUDY OF STANDARD CHARTERED BANK”
BY
[Insert Your Official Name]
A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILMENT OF THE
REQUIREMENTS FOR THE AWARD OF THE DEGREE OF MASTERS
IN BUSINESS ADMINISTRATION GLOBAL
LONDON SCHOOL OF BUSINESS & FINANCE
8TH APRIL 2019
Declaration
I (insert you official name) do certify that this project is my own work and it has never
been submitted to any institution of higher of learning for award of degree of masters in Business
Administration Global. All scholarly sources, from which information has been extracted, are
referenced by use of Harvard format style.
I further certify that I am fully aware of detailed LSBF guidance and regulations
concerning plagiarism and I do agree to comply with them.
Student signature: ___________________________
i
Date: ————————————-
Supervisor Name and Signature
Assessor Name and Signature
Date
Date
Acknowledgements
I thank the Almighty God for granting me good health at the moment I kick started my
academic journey of pursuing masters’ degree at London School of Business & Finance. My due
credit goes to my project assessor (Shahnza Hamid) and internal verifier (Christopher John
Jasko) whose immense contribution enabled me to finalize my project. I do extend my deepest
appreciation to my esteemed comrades from London School of Business & Finance for their
positive criticisms throughout entire journey of working on this paper. Without your countless
contributions, the current work would not have been successfully accomplished. Thank you and
be blessed.
ii
Abstract
The world is changing at a drastic rate due to the effects of globalization. The banking
industry has been affected by various risks leading to compromised businesses. Risk
management is considered as one of the best strategies of attaining financial prudence within the
banking industry. Financial crisis of 2008 showed the necessity and importance of risk
management within the banking industry. Risk administration as enhanced by advanced
strategies is necessary for a commercial bank to attain a unique competitive edge in the highly
competitive industry. Major aim of this study was to analyze risk management framework within
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the banking industry; case study of Standard Chartered Bank. Risk administration practices
within the banking industry are categorized into: risks management environment, risks
monitoring, risk measurement, internal controls, capital adequacy and investment and strategic
guidelines. The study relied on mixed method of research to obtain relevant information and
ideas on risk management within the banking industry. A comprehensive review of literature on
risk management practices within the banking industry was done. A structured and detailed
questionnaire was emailed to target research respondents (selected through purposive sampling)
in order to have their views of risk management at Standard Chartered Bank. Secondary data on
risk management was extracted from Annual Report 2010 of Standard Chartered Bank. Primary
data from the questionnaire was analyzed by use of SPSS and presented using MS Excel charts.
From the study, it was concluded that there is positive correlation of risk management practices
and financial viability of commercial banks. A number of recommendations were made with
view that future research will improve risk management within the banking sector.
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Table of Contents
Declaration ………………………………………………………………………………………………………………………………….. i
Acknowledgements……………………………………………………………………………………………………………………… ii
Abstract …………………………………………………………………………………………………………………………………….. iii
Chapter one ……………………………………………………………………………………………………………………………….. 1
1.
Introduction ………………………………………………………………………………………………………………………… 1
1.1.
Background information ……………………………………………………………………………………………………. 1
1.2.
Drivers of Risk Management ………………………………………………………………………………………………. 2
1.3.
Industry Background …………………………………………………………………………………………………………. 6
1.4.
Risk management at Standard Chartered Bank …………………………………………………………………….. 8
1.5.
Risk Governance……………………………………………………………………………………………………………….. 8
1.6.
Risk Function ……………………………………………………………………………………………………………………. 9
1.7.
Risk Appetite ………………………………………………………………………………………………………………….. 10
1.8.
Stress testing & Scenario Analysis …………………………………………………………………………………….. 10
1.9.
Areas of Risk management at Standard Chartered Bank ……………………………………………………… 11
1.10.
Research Aim ……………………………………………………………………………………………………………… 14
1.11.
Research Questions …………………………………………………………………………………………………….. 14
1.12.
Hypothesis………………………………………………………………………………………………………………….. 15
1.13.
Research Objectives …………………………………………………………………………………………………….. 15
Chapter Two ……………………………………………………………………………………………………………………………… 16
2.
Literature Review ……………………………………………………………………………………………………………….. 16
2.1.
Introduction …………………………………………………………………………………………………………………… 16
2.2.
Challenges of Risk Management within the Banking Sector …………………………………………………. 22
2.3.
Theory of Risk Management in Banks………………………………………………………………………………… 24
Modern portfolio theory …………………………………………………………………………………………………………….. 24
Moral Hazard Theory …………………………………………………………………………………………………………………. 24
Merton’s Default Risk Model ………………………………………………………………………………………………………. 25
2.4.
Summary of literature review …………………………………………………………………………………………… 25
Chapter Three …………………………………………………………………………………………………………………………… 26
3.
Research Design and Methodology ………………………………………………………………………………………. 26
3.1.
Rationale for Embracing Mixed Method of Research …………………………………………………………… 27
3.2.
Data Collection ……………………………………………………………………………………………………………….. 29
3.3.
Benefits and Shortcomings of Primary Sources of Data ……………………………………………………….. 29
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3.4.
Advantages of Using Questionnaires for Data Collection ……………………………………………………… 30
3.5.
Disadvantages of Questionnaires ……………………………………………………………………………………… 31
3.6.
Respondent Motivation …………………………………………………………………………………………………… 32
3.7.
Secondary Data ………………………………………………………………………………………………………………. 32
3.8.
Sampling Technique ………………………………………………………………………………………………………… 33
3.9.
Measures to Ensure Care and Accuracy of the Data Collection Process …………………………………. 34
3.10.
Timescale …………………………………………………………………………………………………………………… 35
3.11.
Data Analysis ………………………………………………………………………………………………………………. 36
3.12.
Ethical Considerations………………………………………………………………………………………………….. 37
3.13.
Research Structure………………………………………………………………………………………………………. 38
Chapter Four …………………………………………………………………………………………………………………………….. 39
4.
Analysis and Discussion of Findings ………………………………………………………………………………………. 39
4.1.
Research Question 1 Analysis: ………………………………………………………………………………………….. 39
4.2.
Research Question Two Analysis ………………………………………………………………………………………. 40
4.3.
Research Question Three Analysis …………………………………………………………………………………….. 41
4.4.
Research Question Four Analysis ………………………………………………………………………………………. 42
4.5.
Research Question Five Analysis……………………………………………………………………………………….. 43
Chapter Five ……………………………………………………………………………………………………………………………… 44
Conclusions and Recommendations: ……………………………………………………………………………………………. 44
5.1.
Conclusion ……………………………………………………………………………………………………………………… 44
5.2.
Recommendations ………………………………………………………………………………………………………….. 46
5.3.
Limitations of the Study …………………………………………………………………………………………………… 47
5.4.
Areas for Further Research ………………………………………………………………………………………………. 47
References ……………………………………………………………………………………………………………………………….. 48
Appendices……………………………………………………………………………………………………………………………….. 50
Appendix 1: Research Questionnaire……………………………………………………………………………………………. 50
vi
An Analysis of the Risk Management Framework within the Banking Sector: “A case study
of Standard Chartered Bank”
Chapter one
1. Introduction
1.1.
Background information
According to Härle et al. (2016), indomitable risk management strategies are relevant for
banks and other financial institutions to gain a unique competitive edge in the highly competitive
industry. Many banks across the world have been making significant moves in ensuring that they
are able to avoid nauseating incidences such as cyber crimes as orchestrated and launched by
people with sinister motives. Risk management within the banking sector has been
revolutionized with the intention of complying with regulations that were associated with the
global financial crisis. There are expectations that indeed risk management is changing at a
drastic rate hence the necessity to comply with technological and other changes.
The term “Risk Management” is defined in business terms by the Financial Times as ‘the
process of identifying, quantifying, and managing the risks that an organization faces. Since the
outcome of business activities are uncertain there is an element of risk. These risks include but
are not limited to strategic failures, operational failures, financial failures, market disruptions,
environmental disasters and regulatory violations which are all statistically measured’. (Financial
Times) Risk Management (RM) is a very important function in every institution particularly the
banking sector due to the ever changing environment, market volatility, new financial products,
technological advancement and the emergence of digital currencies (Lexicon.ft.com. 2018). The
real nature of the banking environment is prone to threats of risks which are embedded in the
activities which remain a critical challenge to understand and control. Moreover, during the last
decade the RM framework of the banking sector has undergone significant transformation,
drastic response to increased scrutiny by regulators due to worldwide financial turmoil and the
high cost of non-compliance in the wake of scandals, bailouts and failures of several big banks.
The global financial crisis has exposed the failure of banks to manage their core business
function “Risk Management”. The deepening impact of the financial crisis eroded public
1
confidence in the banking sector, capital markets retracted to a historical low and regulators have
been made to set new directives to avoid future crisis. According to recent studies conducted by
McKingsey (2016), all indicators suggest that RM will experience increased changes in the near
future. Mckingsey (2016) identified six main drivers which will impact (RM):
(1) Increase regulations – new capital requirement under the Basel III and IV which will
ensure banks maintain adequate capital to within extreme shocks.
(2) Change in customers preference as technology evolve- millennials are more tech savvy
and want the latest trend without too much hassle.
(3) Evolving technology tend to bring new risks management techniques, systems and tools.
(4) New risks factors such as cybersecurity and contagion risk.
(5) Behavioral economics to remove bias
(6) Increase pressure for banks to contain rising cost.
Below is comprehensive examination of the risks that impact risk management framework within
the banking sector.
1.2. Drivers of Risk Management
Trends in risk management within the banking sector do suggest that indeed banks and other
financial institutions can take the advantage of unmatched initiatives in order to remain relevant
in the highly competitive industry. Indeed the banking sector has been experiencing drastic
changes as sparked by a number of trends. For example, it is known that regulations within the
banking sector are expected to broaden and get deep as sparked by number of factors
(McKingsey 2016). Financial and nonfinancial regulations will have a significant impact to even
banks that are operating in the emerging economies. Most of this impetus is attributed to public
sentiments that are intolerant to failures within the financial sector. For example, the 2008
financial crisis is linked to defective risk management strategies among the financial institutions.
Risk management is based on the potential of the bank to be more robust in regulatory and
stakeholder management abilities (McKingsey 2016). Risk management framework does play
pivotal function in the process of aiding banks to reduce risks attributed to technology and
human error.
Risk management framework within the banking sector is grounded on the regulatory
pressure that is exerted to banks by government of the United Kingdom and other governments
2
of the world. For example, it is expected that all banks in the United Kingdom and other regions
of the world are expected to take in part in curbing illegal and unethical monetary transactions.
This is expected to be accomplished through a number of ways such as detecting and unmasking
chances of money laundering, financing of terrorism, fraud and enhancement of tax collection
among others (McKingsey 2016). These functions cannot be accomplished without embracing
the best strategies of risk management. Governments do require banks to be able to align with
national regulatory standards when engaging in global financial business. For example, banks
such as Standard Chartered that operate across the globe are required to comply with United
States’ guidelines on environmental standards, collection of taxes and bribery among others. This
trend has an implication that banks are likely to be monitored and examined in the manner in
which they organize their information asymmetries, transparency in conducting financial
transactions and ability to inform customers on the quality of products and services they
discharge to them.
Risk management framework within the banking sector is also based on ever increasing
customer expectations due to ever changing technology (McKingsey 2016). Advancement in
technology has led to set of competitors who are not interested in being left behind but just being
part in creating direct customer relationship and be able to tap the lucrative part of the business.
McKingsey (2016) states that there has been a trend of increased use of online apps where
customers are able to engage with financial providers at the comfort of their mobile phones. This
has compelled banks such as Standard Chartered to up their game of risk management in order to
attract and retain huge number of customers. Automation of information systems has compelled
banks to attain higher number of customers. Many players such as middle loan providers do not
require customers to fill in length documents during the process of applying for loans but instead
obtain financial details from eBay, PayPal and Amazon among others. Some of the banks have
embraced this strategy where customer data can be obtained from public sources so that the
entire process of meeting customer needs is done in the best and convenient manner (McKingsey
2016). Therefore, the entire process of risk management is accomplished by working closely
with certain businesses so that the process of offering customized services is easily attained.
Generally, the entire process of customization is expensive within the banking sector due to the
complex nature of the supporting processes and real business environment. There are number of
regulatory constraints that are imposed in this area hence the entire process of risk management
3
is important for ensuring that customers are protected from fraudulent decisions made by various
banks. It is of great value for risk management within the banking industry to become seamless
and this is a necessary requirement for attainment of unique customer value.
McKingsey (2016) argues that risk management has alwa…
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