Coursework Task Context

Theme 3 of our GIFP module covers a number of areas relating to risk and risk management whilst Theme 4 looks at the operational aspects of financial institutions. Both are set against a background of minimising risk through regulation.

Traditional finance theory states that "the higher the risk the higher the return it should generate" (Hillier et al, 2018). However, the current regulatory regime is aimed at reducing systemic risk but financial institutions, especially banks, take risks every time they lend money. The higher the risk profile on a bank's balance sheet the more capital it needs to have in order to support this risk. This is a means of controlling the number of risky loans a bank has in its portfolio and reducing the potential of bank failure and the contagion effect this can create. Some bank analysts believe that the regulatory system has contributed to the banks operating in a sub-optimal manner by focusing only on quality loans that produce safe but not high returns, rather than high risk loans which may, by their very nature, be for new ventures or expanding and developing entrepreneurial activity, both of which could be risky.

Requirement:

Critically review the current regulatory regime that banks work under and show how banks can attempt to maximise their profits whilst operating under these regulatory constraints.

Your conclusions should be based on evidence you have reviewed and you may draw upon relevant theories and ideas and where appropriate use analysis, arguments and justification by using examples and illustrations.

In answering this question, you should not only refer to material you have in Themes 3 and 4 in the study materials but you should also look at additional journal articles, trade association publications, and annual reports, showing us that you can conduct relevant and independent research. An in-depth knowledge of Basle 3 is not expected but you might want to refer to it in your answer.

Key descriptors:

Critical evaluation - here you must provide your verdict on the issues and draw conclusions as to what extent a statement or findings within a piece of research are true, or to what extent you agree with them. You must provide evidence from a number of sources which both agree and disagree with the argument presented. You are also required to produce a final conclusion based on your decision on what you think to be the important factors and then justifying how you have made your choice.

Review - this involves you thoroughly looking into a subject. There should be a critical assessment and not just a descriptive review.

Analyse - break an issue into constituent parts and fully discuss these parts.