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The following assignment is based on the UK based multinational bank, Barclays. Being a multinational bank, Barclays has been facing issues that are affecting the business negatively. Based in the United Kingdom Barclays has been a multinational bank that is affected by the economic condition of the countries where they conduct its business. In this report, the prime factors which have been affecting the bank will be discussed thoroughly. A thorough analysis with examples of problems faced by Barclays will be highlighted here. After identifying the issues, recommendations of the suitable models along with mitigation strategies will be suggested to Barclays for surviving the multinational business market and its fluctuations.
Credit risk is referred to the risk of payback that might not be initiated by the person who has opted for a loan from a bank. Barclays bank has been facing high risk related to their lending of loans to clients and this can be identified as the credit risk of Barclays. Weak credit risk management leads to high credit risk. Credit risks can be segmented into different segments to specify the risk
Credit concentration: this usually happens when a business is opting for a loan, Barclay's bank has identified its credit concentration to be high. When a certain borrower, for example, a business or an individual who has been taking loans and is not paying the bank back instead, opting for more loans, it increases the concentration of credit of the particular bank (Miralles-Quirós et al., 2019). This has been happening with Barclays since the pandemic of Covid-19. Barclays bank has tie-up with various organizations within the UK (Home.barclays, 2022). The major risk related to credit concentration arises when the organization to whom the credit has been sanctioned, experiences a downfall, Barclay eventually faces a huge amount of loss in their credits. Apparently, Barclays modified its credit policies and started accepting collateral which also comes with its own risk. It has been identified by Barclays that many organizations or individuals keep land as their collateral. This collateral provided by the loaned can be of dispute which again increases the risk of credit concentration of the bank (Ho et al., 2020).
Issues in credit process: Barclays being a multinational bank fails to attempt a thorough credit check on organizations and individuals who have been taking loans. This leads to a havoc issue as the bank remains unknown of the financial structure of the individual as well as the profit margin of the organization which leads to the credit risk for the bank (Suki, 2018). Therefore, Barclays has been facing this critical issue mainly after the Brexit as they fail to run a background check. Barclay finally suffers a significant credit loss. According to reports, Barclays changed its credit standards and began accepting collateral, which comes with its own set of risks. Barclays has discovered that many corporations or individuals retain the land as collateral. This collateral offered by the borrower might be disputed, increasing the bank's risk of credit concentration.
Negligence in monitoring: being a multinational bank, Barclays fails to monitor the collateral provided by the loaner. An example can be placed that the land properties which has been provided as mortgages to Barclays by the loaners and the organizations before Brexit, after the placement of Brexit the valuation of the properties have decreased through which the bank again have faced credit issues (Home.barclays, 2022). Therefore, the organizations as provided mortgage will not pay back their loan by cash and eventually, the provided property becomes of lesser value than the loan (Cortis and Spitery, 2021). Barclays hence faces this mayhem since the bank is unaware of the individual's financial structure as well as the organization's profit margin, posing a credit risk to the bank.
Issues faced by Barclays: Barclays has been dealing with this crucial issue, primarily since the Brexit since they failed to do a background check. Finally, Barclay suffers a huge credit loss. Barclays, although being an international bank, fails to check the collateral offered by the loaner (Fernández-Olit et al., 2018). An example is the land assets that were offered as mortgages to Barclays by loaners and organisations prior to Brexit. Following the implementation of Brexit, the worth of the properties plummeted, causing the bank to confront credit concerns once again.
Market risks are related to uncertain fluctuations in the global market which can be caused by foreseen causes. Risks related to the market which affect Barclays are as follows:
Uncertain market situation:the most recent example of an uncertain market situation can be identified with the military conflict between Ukraine and Russia which has affected the global market widely. The international community has been imposing strict policies regarding transactions with Russia which has been the prime cause of this uncertain shift in the market (Azmi et al., 2021). This issue has caused severe fluctuation in the economy worldwide including international banks like Barclays. Barclays earns their profit through forex which now has been closed between UK and Russia and also due to the Covid-19 pandemic (Zhu et al., 2021). This has resulted in Barclays dealing with this crucial issue, primarily since the Brexit since they failed to do a background check. Finally, Barclay suffers a huge credit loss. According to sources, Barclays altered its credit requirements and began taking collateral, which has its own set of hazards. Many firms or individuals, according to Barclays, keep the land as collateral.
Commodity prices:Brexit is the prime cause which the value of the currency pounds degraded in the United Kingdom. Barclays was eventually affected by this huge shift in the economy (Home.barclays, 2022). Afterwards, due to the pandemic of Covid-19, prices of the commodities took an unexpected hike which was beyond expectation. This affects Barclays was their credit risks increases with such fluctuation in the economy. Due to such fluctuations with unemployability, the rate of loans is increasing with increasing credit risks for Barclays. Therefore, the market risks are relevant to the credit risks of the bank as both are affected by both (Venugopal et al., 2018). This has an impact on Barclays since their credit risks have increased as the economy has fluctuated. Due to such changes in unemployment, Barclays' lending rate is rising, as are the credit risks. Henceforth, market risks are important to bank credit risks because both are influenced by both.
Brexit and Barclays:According to sources, Barclays altered its credit requirements and began taking collateral, which has its own set of hazards. Many firms or individuals, according to Barclays, keep the land as collateral (Hilmola, 2020). The borrower's collateral may be challenged, raising the bank's risk of credit concentration. Nevertheless, being a worldwide bank, Barclays fails to do a comprehensive credit check on organisations and people who have taken out loans (Home.barclays, 2022). This creates mayhem since the bank is unaware of the individual's financial structure as well as the organization's profit margin, posing a credit risk to the bank. Hence, as of this, Barclays has been dealing with this crucial issue, primarily since the Brexit, since they failed to do a background check. Finally, Barclay suffers a huge credit loss along.
External frauds: fraudulent act has been a rising concern for Barclays as the circumstantial environment is affecting the organizations and individuals who have been taking a loan from the bank (Home.barclays, 2022). External fraud is referred to the illegal and misleading activities conducted by the third parties which do not involve anyone from the bank that is employees or managers. External frauds include hacking of security devices and systems by the one who has taken a loan from the bank but is not willing to pay back hence, opts for fraudulency.
Internal frauds: when the internal members of the bank Barclays take part in any illegal and misleading act, it can be termed internal fraud. Internal fraud usually occurs when corruption in the workplace occurs. Barclays has a high risk of facing internal frauds due to the onset of Brexit after effects, an increasing pandemic of Covid-19 and due to the military conflict between Ukraine and Russia (Home.barclays, 2022). This outer environmental disruption increases commodity prices which intrigues the internal staff of banks to perform internal fraudulency.
Malicious damage: referred to when someone within or from outside of the bank performs an act that comes from anger and the property of the bank is damaged irreversibly. Terrorism and vandalism are also considered to cause malicious damage as the theft of money are non-replaceable. Unlawful and deceptive operations carried out by third parties that do not involve any employees or officials of the bank external frauds include the hacking of security devices and systems by someone who has taken out a loan from a bank but is unable to repay it and so resorts to fraud.
1 = Very Low
2 = Low
3 = Medium
4 = High
5 = Very High
Hazard Rating = Likelihood x Impact
Hazard Rating Scale:
1 – 5 = Very Low
6 – 10 = Low
11 – 15 = Medium
16 – 20 = High
21 – 25 = Very High
Barclays must adopt a better model within their business which would help them in their credit risk management. Credit risk management must be adapted well and utmostly by Barclays in order to maintain their security in the market of fluctuation. Credit risks can be managed by Barclays by following one of these models or all:
Probability of Default (POD): the Probability of Default or commonly termed POD is application for both an individual loaner and an organization. Considering the scenario of an individual, POD allows a bank to understand the situation of the individual and one should oblige to the loan norms and terms. The loan is provided to individuals only after analysing the credit score or the annual income of the loaner by the bank (Banerjee. and Majumdar, 2020). If the person is in need of a loan, the bank can take in collateral which would be assessed by the standards of the time. In other serious scenarios, a POD would allow Barclays to help an individual who is in need by providing a low-interest rate against the loan and also with no down payment which would eventually not harm Barclays with their credit risks.
Loss Given Default (LGD): loss given default helps a bank to calculate an amount that would be a loss to them if the loaner fails to pay back their loan. Loss given default or LGD is applied by banks when two consecutive loaners are concerned. This model of credit risk management helps Barclays to understand the amount of credit they would be losing if one of the two loaners fails to pay (Atilgan et al., 2022). This LGD will allow Barclays to charge one of the two consecutive loaners with the amount of loan they have provided to both if one fails to pay them back. Through this, thy will manage to balance their credit concentration issue.
Exposure at Default (EAD): Taking into account an individual's position, EAD or Exposure at Default helps a bank grasp the individual's condition and one should abide by the loan norms and terms. The bank only makes loans to individuals after analysing the loaner's credit score or yearly income. If the individual requires a loan, the bank can accept collateral that is evaluated according to current criteria. In other words, an EAD would allow Barclays to assist a needy individual by offering a low-interest rate on the loan and no down payment, which would ultimately not impair Barclays' credit risk (Pelster et al., 2018). Awarded a defeat default calculation assists a bank in calculating the amount that would be a loss to them if the loaner failed to repay their loan. Banks use EAD or exposure to default when two successive loaners are involved. This credit risk management model assists Barclays in determining how much credit they would lose if one of the two loaners failed to pay.
VaR (Value at Risk): The market risks of Barclays can be analyzed by them with the help of these calculative metrics. This VaR is used when it is necessary for an international bank like Barclays to assess the market risks of the global market. The Value at Risk model would help Barclays to conduct a statistical calculation on the return of assets which would help them to understand their revenue collection (Zaremba et al., 2020). In simpler terms, the VaR model would help Barclays to understand the risk and profit of the loan they have landed or the value of the collateral they might gain if the loaner fails to pay back which would balance their credit rates. On the other side, this would allow Barclays to help a needy individual by issuing a low-interest loan with no down payment, which would not jeopardise Barclays' credit risk. A defeat default calculation aids a bank in determining the amount that the bank would lose if the loaner fails to repay their loan.
Beta: This is employed when a multinational bank, such as Barclays, needs to examine the worldwide market risks. The Beta model would enable Barclays to do a statistical assessment of the return on assets, allowing them to better understand their revenue collection (Radulescu et al., 2018). In layman's words, the Beta model would assist Barclays in understanding the risk and profit of the loan they have secured, as well as the value of the collateral they would obtain if the loaner fails to repay, so balancing their credit rates. On the other hand, this would enable Barclays to assist a needy individual by giving a low-interest loan with no down payment, without jeopardising Barclays' credit risk.
CAPM: Capital Asset Pricing Model: Taking into account an individual's position, the Capital Asset Pricing Model or CAPM helps a bank to grasp the individual's condition and one should abide by the loan terms and conditions. The bank only makes loans to individuals after analysing the loaner's credit score or yearly income. If the individual requires a loan, the bank can accept collateral that is evaluated according to current criteria. In other words, the Capital Asset Pricing Model would allow Barclays to assist a needy individual by offering a low-interest rate on the loan and no down payment, which would ultimately not impair Barclays' credit risk.
The worldwide bank Barclays, located in the United Kingdom, was the subject of this project. Barclays, the world's largest bank, has been coping with problems that are harming the company. Barclays is a multinational bank impacted by the economic situations of the countries in which it operates. This research thoroughly evaluated the major variables controlling the bank. A comprehensive research with examples of Barclays' flaws has been effectively presented above. Following the identification of the issues, Barclays was provided suggestions for acceptable models as well as mitigation measures for surviving the global business market and its swings.
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