The Newcastle Business School

Masters Dissertation Proposal

Name ____________Programme ___Business with Fin. Mgt

(SURNAME) (FORENAMES)

This form MUST be accompanied by the Triplicate NBS PG Dissertation

Registration Form

The number of words for each section are for GUIDANCE ONLY.

1 Researchable Topic Area: you should include background and issue(s)

underlying the research (approximately 150-200 words):

The proposed title for the dissertation is ‘Can risk be managed effectively: a
case study of the UK banking sector, 2007-2010’. The purpose of this
dissertation will be to look at the banking sector in the UK during the financial
crisis, it will assess the measures taken by the banks exposed to risk (liquidity
risk, credit risk and market risk) and how, following the initial ‘credit crunch’,
they have managed the risks accordingly. Looking at banks which have
survived and been nationalised will s
how a difference in strategy for risk management. This will compare literature
on risk management and how best to manage it with company’s reported risk
management policies and assessing the company’s ability to sustain when risk
presents itself.

The main objectives and aims of the dissertation is to propose alternative risk
management strategies for the UK banking sector, using the exposure of risk
from 2007-2010 to highlight what was done and how risk could be better
managed. The current theory suggest that traditional risk assessment
measure such as; Value at Risk (VaR) is inadequate for the markets it has
been argued it is ‘like an airbag that works all the time, except when you
have a car crash’ (Einhorn, D., 2008) this has been reiterated because of ‘the
use of short-run risk measures to assess long-term risks’ (Engle, R., 2009).

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2 Objectives for the Research: you should state3-4 maximum research
objectives,relating toacademic theories, your proposed investigation, your
analysis and your conclusions (approximately 80-100 words):

This issue can be developed into definable objectives for the dissertation;

 To identify the risk assessment models, frameworks and theories

available to assess risk in three broad categories; Market risk,
Liquidity risk and Credit risk.

 To explore the risk management strategies in place within the UK

banking sector, looking at HSBC, Lloyds TSB, Barclays, RBS and
Standard Chartered predominantly.

 To assess the models against the historical data of what actually

took place during the financial crash, for example how effective
were the measures.

 To propose alternative measures, such as those imposed by

external regulators, stress testing by the IMF and new measures
placed in different countries, for example the ‘Stern Systemic Risk
Contribution- SRISK’ (Torres, C., 2011).

 To make recommendations on how the banks can better manage

risk, critically evaluating new concepts with practices in place and
theory to underpin the research.

3 Literature Review: you should identify and discuss the academic theories
and some current research relevant to your researchable topic area You
should use in text citations, Harvard reference style and add a full reference
list in Section 8 (approximately 500–700 words).

Much of the literature on risk management focuses on the research done on

the Value at Risk measure (VaR), this has been criticised by many academics
which discuss its ‘uses and abuses’ (Culp et al, 1998) this literature suggests
that it is an ineffective measure based on how firms use VaR. This literature is
pre-financial crisis however and the crisis highlighted the importance of
liquidity risk to financial services (Pedersen 2009) which is largely ignored by
Culp.

Other criticisms of VaR divulge how it is based on predetermined volatilities

which again affect risk and therefore this presents their ineffectiveness (Engle,
2009). This article is interesting and current in comparison to earlier criticisms
however it does not offer a solution to the limitations of risk management
measures, only that there are limitations.

The same author, Robert Engle, is currently working on developing a stress

test for US banks and their contribution to systemic risk (Torres 2011). This

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was published in a weekly business paper however so therefore the research
is in infancy and therefore not been exposed to literature review of been tried
or tested in order to see how effective a measure it will be.

Systemic risk is largely ignored in academic journals relating to risk

management as it is seen to be a risk that is managed through regulation,
however systemic risk is a factor which should be considered as it affects at
corporate level as much as at country level (Lehar 2005). This explores the
effect of market contagion, a particular problem which affected the period of
analysis of the dissertation from 2007-2010.

Other aspects of systemic risk include the ‘convergence between the

insurance and banking industries often referred to as bancassurance’ (Zech,
2001). This is something which affected the US banking sector and led to the
bail-out of AIG, this is something to consider when looking at the overall risk
management within the UK, the article which talks about the convergence of
industry risk does not however base its findings on actual data and is more
theoretical based. It does however point to convergence as a risk which may
have affected the global financial crisis as much as liquidity risk, something to
consider when addressing and analysing the risk management strategies
employed by the UK banking sector banks.

Literature which talks about risk management should consider the impact of
risks of consequential low probability events (Black Swans) (Taleb, 2010); this
has been cited by Taleb, Engles and other recent critics of VaR frameworks.
The issue with Taleb is that his writing is often for entertainment such as his
Black Swans, which may give him biased perspective and also not as
thorough as peer-reviewed articles, although he has written scholarly articles
which raise issues in current risk management.

Looking at Northern Rock which was nationalised as a way of bail-out for the
firm which had liquidity risks which would therefore suggest they had poor risk
management, and something which affected the UK Banking Sector is the
‘impact of outside finance on the quality of investment’ (Von Thadden, 1995). It
would prove difficult to obtain the level of data required to apply this theory
directly to the UK banking sector however it provides insight into another risk
affecting the sector and highlighted in the case of Northern Rock.

There is much literature on liquidity risk facing banks, ‘Liquidity and Risk
Management’ (Holmstrom, & Tirole,., 2000) is an example which is a big
problem and is very relevant to the crisis of the period being explored 2007-
2010. This will be useful to analyse the specific risk of liquidity when looking at
the proposed dissertation topic.

Conclusively much of the literature is varied, some are based on out-dated

models as the varying financial instruments created to make money are
changed and therefore the theory becomes out-dated, this means that the
most current literature is needed to look at the risk management techniques
available in the current economic climate which the banking sector sits in.

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4 Details of your research: (a) Identify who or what you will use to obtain
data or information (b) Explain how you will collect this data / information and
how you will get access (c) Identify how you are going to analyse your data /
information (approximately 500–700 words).

The data needed to correctly address the dissertation topic will come primarily
from annual reports from various UK banks during the years 2007-2010. This
will provide a look at their different strategies for risk management as well as a
look at their different financial statements to evaluate their performance during
the financial crisis. This data will be biased as it is reporting done from the
view of the company for the shareholders; however it does have to adhere to
Generally Accepted Accounting Principals (GAAP) so most of the statistical
data will be useful to evaluate performance.

As well as this the dissertation will look at share prices which will give an
indication of how firm is valued by shareholders, this again may cause
problems as share prices are a dubious measure of profitability of a firm due
to the argument of whether or share prices reflect market value. To
complement the share prices the dissertation will look at the press releases
and media reporting during the years 2007-2010 for the banks, however I
must consider the bias of reporting from second party reporting and their
invested interest and readership, so this information may be used very
selectively.

The combination of external sources and internal reporting should in practise

give a balanced view if reasonably assessed to find information which is
reported without bias and has validity to the are of the dissertation. This will
be then compared to theory surrounding risk management to critically analyse
strategy of the firms with the theory that suggests best practise for risk
management.

I will look at data from; HSBC, Lloyds TSB, Royal Bank of Scotland Group,
Standard Chartered and Barclays. These are the main banks which are UK
based; therefore their reporting will follow similar frameworks and be relatively
similar to make cross-comparisons, particularly in terms of audited reports.

The data will be a mix of statistical, from public reporting, such as the IMF’s
report on Stress Testing. Numerical from the Annual reports to derive the firm’s
position on liquidity. Graphical data in terms of the share price of companies,
this will compromise numerical data. There will also be qualitative data used
when looking at events which took place and reporting of the crisis and
reporting on risk management from the country which will be where the most
biased writing will arise from.

My choice of method is to look at public companies which will affect the wider
public and have had recent criticism over risk management, the best way of
data collection is to use data which is accessible from the public domain as it
is possible to get hold of and can be put to use in different ways due to the
forced transparency of the companies to publish their financial results which
have been audited and therefore accurate.

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There have in the past been accounting reporting scandals; however the most
notorious one, Enron happened in America, this research is based within the
UK and it is highly unlikely that my research will uncover accounting reporting
fraudulent activity.

To make comparisons of performance from the UK banking sector the

dissertation will analyse financial data using various tools for measuring risk
from data available in the public domain. The various tools used could be to
look at the gearing ratio, liquidity ratios and other financial tools to assess the
differences over the period of 2007-2010.

To assess the risk and the methods of risk assessment there can be
calculations made based on VaR and then on alternative methods of risk
assessment to compare the results and evaluate which method is a better risk
assessment and therefore derive a strategy for better risk management.

The data needed to conduct analysis of risk and financial analysis of firms is
widely available. I will also look at strategy of firms which will be harder to
obtain but may be able to get a grasp of it from annual reporting, bearing in
mind that it is written for the shareholders and therefore may be biased to
presenting a picture of a non-risk taking strategy to ensure the investment is
sound.

5 Research ethics: - if your study involves people, briefly describe what you
will consider in order to ensure that your research follows the University’s
Ethical Policies and Procedures, for example, individual consent and / or
organisational consent. If your study involves secondary data only, you should
advise us of any ethical issues or the absence of any ethical issues
(approximately 50–100 words).

The data being used in the dissertation is all available in the public domain,
such as Annual Reports of companies operating in the UK banking sector or
statistics from the International Monetary Fund (IMF) to make comparisons.

This means there are little ethical problems as the data is public, however
misrepresentation should be avoided in order to not skew the data to produce
an outcome for the purpose of the dissertation and only interpret the data with
validity. As it only involves public companies and there has been past
research in the area it should not pose any ethical problems.

6 Conclusions: you should describe what your research will achieve by

referring back to your objectives in Section 2 (approximately 100–200 words):

Potential outcomes could be that there is no certain way to manage risk as is

argued by some (Taleb, 2010) who argues the purpose of a risk is that we

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 cannot prepare for it. This would mean that there is no best-fit strategy, it may
be that there are better techniques than others to manage risks in order to
keep firms profitable for shareholders whilst conducting good corporate
governance and risk management methods to avoid a repeat of the financial
crisis in 2008.

Anothr finding may be that there could also be a better method of assessing
risk which the banks are not using. There may be a better determinant of risk
but is not as desirable for use as it may adversely affect profitability of firms
and therefore avoided in their strategy for risk management. For example if
the risk management requires the bank to hold onto large amounts of capital
that could be used to finance other activities to improve shareholder return
then this is going to present a conflict of interest and is a potential outcome of
the research.

7 Timetable for your research: you should cover the whole period of time
available (by month). You should indicate below when you are going to work
on various parts of your dissertation, for example, your literature review, your
collection of data / information, your analysis of the data / information, your
conclusions and final revisions of your dissertation:

Month Dissertation Activity (parts)

June Refine Research Objectives
July
August Literature Review and Design Data Collection strategy

September Research methodology and Analyse secondary data

October Complete Chapter 1 and 2
November Finish analyzing secondary data
December Finish Chapter 4 and 5
January Refine drafts of all chapters, proof read and submit

8 Reference List – in Harvard style.

Culp, C.L., Miller, M.H. and Neves, A.M.P., (1998) ‘Value at Risk: Uses and
Abuses’, Journal of Applied Corporate Finance, vol 10, 4, pp.26-38

Einhorn, D. (2008) ‘Private Profits and Socialized Risk’, Global Association of

Risk Professionals, June/July, 42, pp.10-26

Engle, R. (2009) ‘The Risk That will Risk Change’, Journal of Investment
Management, Vol, 7, 4, pp.1-5

Holmstrom, B. & Tirole, J. (2000) ‘Liquidity and Risk Management’, Money

Credit and Banking, Vol.32, 3, pp.216-319

Lehar, A. (2005) ‘Measuring Systemic Risk: A Risk Management Approach’,

Journal of banking and finance, pp.2577-2603

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Pedersen, L.H. (2009) ‘When Everyone Runs for The Exit’, International
Journal of Central Banking, Vol 5, 4, pp.177-198
Torres, C. (2011) ‘Risky Business’, Bloomberg BusinessWeek, February 7-13,
pp.39

Taleb, N.N., (2010) ‘Why Did the Crisis of 2008 Happen?’ [Online] available
at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1666042 (accessed:
14th February 2011)

Von Thadden, E-L. (1995) ‘Long-term Contracts, Short-Term Investment and

Monitoring’, Review of Economic Studies, 62, pp.557-575

Zech, J. (2001) ‘Rethinking Risk Management: The Combination of Financial

and Industrial Risk, The Geneva papers on Risk and Insurance, Vol.26, 1,
pp.71-82

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