how risk appetite and tolerance influence the organisation when it comes up to decision making taking E.Sun and SinoPac Banks as

Project Risk Management

and

Risk Appetite

 

By

 

Yin-Chia Hung

 

 

 

Dissertation submitted in partial fulfilment for the of Degree of Master  of Science in Msc

 

Yin-Chia Hung   WMG

University of Warwick

 

 

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Abstract

 

The recent financial crisis has evoked interest in regulation of bank risks in general and of market risks in particular. Heavy losses on trading portfolios incurred by some of the largest banks in Taiwan and across the globe have elicited deficiencies in their internal models and processes for managing market risks. Currently, in Taiwan and other nations, banks are searching for new ways of expanding their underwriting capacities and managing their risk exposures.

Project risk management is the art of and science of recognising, analysing and responding to risk all through a project’s life cycle and in the best interest of meeting project objectives. A frequently overlooked aspect of project management, risk management can often result in a significant contribution to the success of projects. Risk management can have a positive effect on selecting projects, identifying the projects’ scope, and making practical schedules and costs estimates. It helps project stakeholders appreciate the form of the project, engages team members in defining strengths and weaknesses. Project risk management also helps to integrate the other project management knowledge areas. When risk management is effective, it results in fewer problems, and for the few problems that exist, it results in more expeditious resolutions.

Other features associated with the risk appetite include the thought that an appetite will normally relate to a range of possible outcomes. Therefore, around the risk appetite there is normally a given zone of risk exposure or level for the risk that is within appetite. This may be referred to as risk tolerance range for exposure to that risk. The aim of developing risk management strategy is to establish a framework on the basis of which effective risk management procedures can be set. The other aim is to determine how risk management can be embedded in regular project management activities.

While assessing the impacts of Project Risk Management and Risk Appetite in E.Sun and SinoPac Banks, two research questions were formed to act as a guide. The first objective was to carry out a critical assessment of the benefits of a formal risk management in the Banking Industry taking E.Sun and SinoPac Banks as case studies. The second objective was to determine the impact of risk appetite on business conduct under the current economic circumstances taking the two banks as case studies. The research objective was to understand how risk appetite and tolerance influence decision making in Banking Industry. This was achieved by contrasting and comparing regular delivery projects with financial investment projects. Referring to the nature of research topic and the ease in getting information, the researcher considered it crucial to approach the research from a qualitative research paradigm. In that case, the research was conducted in an inductive approach using E.Sun and SinoPac Bank as case studies and data was collected from various sources. Data was collected mainly from secondary sources.

Nonetheless, the research outcomes make it possible to deduce effective project risk management strategies that have assisted E.Sun Bank and SinoPac Bank in their risk management.

Table of Contents

  1. Chapter One: Introduction
  2. Chapter Two: Literature Review

2.1 Project Risk

2.1.1 Risk Appetite

2.1.2 Project Risk Management

2.2 Importance of Risk Management

2.3 Project Risk Management Process:

2.3.1 Risk identification

2.3.2 Risk assessment

2.3.3 Risk quantification

2.3.4 Risk response planning

2.3.5 Risk monitoring and control

2.4 Why it is necessary for risk management iteration in the project life cycle

2.5 Enterprise Risk Management

2.5.1 Office of Government Commerce

  1. Chapter Three: Research Methodology

3.1 Research Philosophy

3.2 Research Approach

3.3 Data Collection

3.4 Qualitative vs. Quantitative

3.5 Research Strategy

3.6 Research Method

3.7 Validity and Reliability of Results

3.8 Research Plan

3.8.1 Research Plan and Time Frame

  1. Case Studies Analysis E.Sun Bank &SinoPac Bank (approx. 3200 Words)

4.1 Research Question 1: What are the benefits of a formal risk management in the Banking Industry?

4.1.1 Results& Findings

4.2 Research Question2: What is the impact of risk appetite on business conduct under the current economic circumstances?

4.2.1 Results& Findings

  1. Summary, Conclusion& Recommendations

References 

  1. Chapter One Introduction

Due to complexities intrinsic in the global business environment and the competitive environment in the Banking industry, most financial organisations and banks are exposed to various risks.  Some of the risks are controllable by Banks, and there are others which are behold the control of the financial institutions. These risks and uncertainty are believed to have a significant effect on the operations of the financial institutions. Claessens 2004 asserts that the efficiency of a bank’s project risk management is directly proportional to the maturity of its risk management practices. He further emphasises the extent to which the risks have been efficiently integrated into the projects it implements (Claessens, 2004). In Claessens (2004) definition, integration means whether risk management activities are well defined and described in the project life cycle. It additionally refers to whether the activities happen regularly, as an element of project management processes.

Dent (2009) defines Project risk management as a process that ought to commence from project inception, and go on until the project is finished and its anticipated benefits realised. Basri (2008) and Dent (2009) further states that project risk management provides a holistic view of project risks identifies potential problems. Project risk management also builds processes to assist the service provider monitor and manage the risks.

Risk appetite is the level of risk that a company chooses to take based on the company-specific capability and assets available to absorb the risk (Basri, 2008 and Dent, 2009). Graham (2008) states that companies are well advised to consider what risks are acceptable to the company, and a suitable guidance to be followed throughout the organisation. There is no single correct way to fix the level of risk appetite or risk tolerance of a company (Graham, 2008). Grace and Robert (2003) state that smaller companies or organisations have less risk appetites compared to larger organisations or companies. This is because larger organisations are able to absorb the downside consequences of taking extra risks compared to smaller organisations (Claessens 2004). The level of risk appetite for a bank depends on how the bank operates the chosen strategy and the organisational culture; all interlinked (Graham, 2008).

As a subject of considerable concern, as emphasised by Yildirim and Philippatos (2007), risk management entails the identification process, evaluation and risks prioritisation and then successively followed by coordination and economical application of the existing resources so as to reduce, monitor and control the outcomes of the unfortunate events.

Research findings reveal that E.Sun and SinoPac Banks’ risk management strategies have been improving since the onset of the global financial crisis (Hoggarth et al., 2005). However, the possibility for a national bank crises and bank failure appear to be real over the short term. This situation as stated by Grace and Robert (2003) can be devastating not only to Taiwan but also to European economy in particular and global economy in general. This view is true despite the turn that the current financial crisis takes in some major economies like the US and therefore, the evaluation of the Taiwan banks’ risk management techniques is significant (Hoggarth et al., 2005).

In the short term, the Taiwan banking sector’s raising of the interest rates by the prime banks is received with mixed signal as a mitigation measure for the poor performance and creditworthiness (Lepetit and Tarazi, 2008). With the shock posed by the presence of other risks, the banking sector is prone to be forced out of its strong operational position as a result of the many structural adjustments that have been effected over the last few years (Baltensperger, 2002).

Claessens (2004) asserts that the Taiwan banking industry is concerned about risk management. All banks are searching for ways to control risk so that they can provide better services to their customers and decrease their risk exposures. Traditionally risk management has been the area where underwriters, lawyers and quantitative analysts have been employed (Lepetit and Tarazi, 2008). Their jobs were to put in place and implement policies that would protect investors, customers and business. As the banks look for new ways to increase their profits, they have to modify their risk policies. This dissertation seeks to identify the risks in the banking sector in Taiwan and establish risk management techniques that will ensure that possibilities of occurrence of such a crisis are minimised.

Research Aim and Objectives

The main aim of this research is to determine how risk appetite and tolerance influence the organisation when it comes up to decision making taking E.Sun and SinoPac Banks as case studies. The research further compares and contrasts risk appetite in regular delivery projects with financial investment projects. To achieve the research aims, the scenario in Taiwan’s banking sector was closely scrutinised to explore the risk management techniques used in E.Sun Bank.

The objectives of the paper are the following:

  1. To determine how risk appetite and tolerance influences the banking Industry when it comes to decision making taking E.Sun and SinoPac Banks both in Taiwan as case studies. The risk-preferences of managers were investigated to measure bank risk efficiency and its components.  Examining managerial risk-preferences lead to a determination of whether the bank is risk-neutral, risk-averse, or risk-loving.  The vital role of financial capital is highlighted as a tool employed by bank managers in managing and controlling their banks’ risk of failure.
  2. To contrast and compare risk appetite in regular delivery projects with financial investment projects. In addition, liquidity regulatory measures and supervision was examined closely, and its significance emphasised as it is the case with the capital regulation. This will then encourage more focused regular, supervision of both E.Sun and SinoPac Banks’ liquidity status and test of their risk management techniques. Establishment of a core funding ratio that will create assurance of sustained funding of the individual banks’ was considered.
  • The research further seeks to identify the benefits of formal risk management in the Banking Industry. In so doing, the research seeks to analyse the impact of risk appetite on business conduct under the current economic circumstances.

Significance of the Study

As stated by Blue and Jeremy (2009), the Banking industry is characterised as one that looks to maximise profitability and minimise financial risk. Banks are not in the business to lose money.  Banks are by nature exposed to a number of risks: credit risk, interest rate risk, liquidity risk, foreign exchange risk and general market risk. Risk management is a central issue for banks (Aliber, 2005).

 

  • The paper is meant to pave the way in providing alternative ways in which the E.Sun and SinoPac Banks and other Taiwan banks can take to tackle the challenges posed by the financial instability and risks.
  • This research assists in identifying the risk and management techniques will provide practical ways in which banks can take advantage of the powers availed.
  • The research further helps in identifying the use of the special powers to assist the banks out of the distressed status in a manner that mitigates the effect on the nations’ economy and the functioning of the entire financial system. In doing so, the dissertation will draw the banks’ attention to the prevalent risks identified in the research and challenge their management to implement the recommendations made so as to avoid their recurrence.
  • Recurrent studies in the area of risk management in E.Sun and SinoPac Banks offer a chance for intensive assessment of risks by banks inducing informed measures and initiatives for risk reduction and avoidance. In addition, the study will actively assist in strengthening the operation of the financial intermediary operators by having them understand the perceived risks and learn how to work with the banks in managing them. Further, the paper will be a means to remind the other financial institutions to maintain due diligence in their daily operations, particularly in the core payments, lending and in the basic systems that support their precise existence. This would initiate a sustainable system within Taiwan and other nation’s banking sectors that would in effect support the international financial system (Blue et al, 2009).

For bank managers, the results of achieving these objectives will improve their performance by identifying “best practices” and “worst practices” associated with high and low measures efficiency and risks.  Best practice risk management tools in attaining bank efficiency will be outlined (Santomero, 1995). The research is thus essential for both banks in Taiwan and other nations.

Organisation of the Research

This analysis begins with a statement of the aims and objectives.  A review of related literature is presented in chapter two.  The available literature in the Taiwan banking industry has dealt with the issue of rapid growth while the question of risk exposure and response to it has been looked on fleetingly.  Different types of risks faced by both E.Sun and SinoPac Banks are discussed. The section also discusses the initial conditions and the quality of banking institutions.  Conclusion summarised the literature review.

Chapter three details the methodology used in data collection. The research heavily relies on secondary materials.

The fourth chapter describes the result and discussion of the findings.

Chapter five presents a summary of data and the results, conclusions, and policy recommendations.

  1. Chapter Two: Literature Review

This section spells out the findings of the secondary research that was carried out for this study. The findings are drawn from different scholarly works and are presented as facts. It is significant to note that this section covers different general subtopics that pertain to project risk management. Also, it is essential to note that this section will look into project risk management from the context of the banking industry because the entire study is based on a case study of a bank.

2.1 Project risk

According to Cooper et al. (2005), the term risk is the chance of something happening that will have an impact upon objectives, which is measured in terms of consequences and likelihood.  Rescher (1983) stated that project risk exist in three different categories that include; unstated yet incorrect assumptions, unknown things and omissions and errors. Unstated yet incorrect assumptions is a risk category that is potentially devastating, for example developing a software on a platform of a single language and later in the project development it is noted that to achieve maximum performance it is important to include other languages into the software. In the risk category of errors and omissions, these occur because of incorrect specifications, estimation mistakes and overlooked features. These risks are at times considered mundane but they have a high propensity of negatively affecting the outcome of a project.

Hillson (2007) notes that in the basic description of project risk; there are two key elements, which are usually factored in; they include condition i.e. the situation, circumstance or a set up that causes uncertainty. The second element is consequence i.e. what is/are the possible outcome of the current condition.

Summarily, Heldman (2005) argues that project risk has numerous definitions based on the different context or practice area that it may be applied, while Risk management is part of everyday life and it is practiced in managing major construction projects, organisations or simply whilst a pedestrian is crossing the road. It is however, important to acknowledge that risk management practitioners, consultants and even scholarly work mainly specify or specialize on a certain set of practice areas of risk, which include; economic risk, human factors risk, financial risk, health risk, security risk, environmental risk, societal risk, business risk and information and communication technology risk.

Each of these risk practice areas is widely discussed and broad in their individual context. Since this present dissertation will include the banking industry as its case example, it is pertinent to discuss financial risk. Financial investments are also perceived as projects and Cokelyet al. (2012) notes that they are seen as projects because they involve works that are organised carefully and designed to achieve a particular aim which vary depending on the field of the financial investment. For example the banking business is a project that involves provision of various products and services that aim at protecting customers’ deposits, offering loans and other additional services such as safe custody. Secondly, investment banking business is a project that involves buying and selling shares and stocks with the main aim of generating a substantial return for the customer.

Specifically, Hopkin (2012) notes that in the financial market there exist three different types of risks that include; operational risk, credit risk or market risk.

Market risk has been described by Saunders (1999) as the possibility of an investor incurring loss in his or her trading operations at the financial market due to moves in market factors.  There are mainly four market risk factors that include; currency risk i.e. risk that foreign exchanges rates will fall. Equity risk is a risk in the fall of stock prices while commodity risk is the risk of a fall in prices of commodities such as gold or oil. Lastly interest rate risk which is the risk that interest rates will change and erode returns (Siems, 1996).

According to Tysiac (2012) credit risk also known as risk of default on the repayment of debt, is in the financial markets described as risk that affects trading operations when an investor fails to take up securities he or she had initially bought or takes up the delivery and fails to pay at settlement of a derivative contract.

 

Operational risks in the financial market are described by Scholes (1972) as the risks that originate from players in the market and the entire process at the financial market.  Mistakes by brokers and even fraudulent activities by them amount to operational risk, in addition factors such as technological, failures, poor management, errors in financial reporting, rogue trading i.e. brokers making personal gains from funds of investors and lack of control and accountability all amount to operational risk in the financial market.

2.1.1 Risk appetite

Kendrick (2003) in his studies described risk appetite as the willingness of a project manager or organisation to take on risk. A high risk appetite infers that the project manager or the business organisation is ready to take on more risk in pursuit of the set goals, and low risk appetite infers that the project manager or the business organisation is not ready to take on big risks.  It is critical to consider the concept of risk appetite before commencing risk management since it is vital in the effective setting and implementation of risk management measures.

The concept of risk appetite is analysed from different angles, for example when looking at the concept from a threats angle it considers the extent of exposure that is perceived as justifiable should the threat become a reality. From a threat angle, risk appetite compares the cost of risk prevention to the cost of exposure should the threat become a reality and finding a justifiable balance (Dirk, 2008).

While looking at the concept of risk appetite from an opportunities angle; risk appetite considers to what extent a project manager is willing to risk so as to attain the maximum potential/ benefit of the project. From this angle, risk appetite compares the actual value of the returns of the project to the losses which might have been accrued (Wideman, 1992).

In construction projects a constructor will be deemed to have high risk appetite if he/ she undertake a construction project along a coastline that is prone to various threats such as rise of water/ sea level, earthquakes or flooding. However, such a project offers high return since properties along the coastline are considered attractive and they fetch high market prices. In financial investment, investors with high risk appetite usually take up shares and equities that are highly risky but are usually deemed to be highly rewarding.  However, it is important to note that some risks are unavoidable and at times an organisation cannot effectively manage to reduce the risk to a tolerable level, an example of such a risk is terrorism (Dirk, 2008).

2.1.2 Project risk management

Referring to the studies conducted by Van et al (2004) project risk management has been defined as a process of identifying, assessing and prioritising risk, this is the process of identifying, assessing and prioritising risk, this is then subsequently followed by coordinating and economically applying resources in a bid to reduce, supervise and manage the probability or the effect of unforeseen occurrences.

In the financial management context, risk management has been defined by Tapiero (2004) as the understanding and communicating of the identified risk, so as to ensure that the identified risk is given the wide attention it deserves.

Project risk management adopts different strategies that mainly aim at reducing the impact of an identified risk or reducing the probability of a certain risk occurring; eliminating the identified risk; transferring the risk to another party within the project or, even some avoidable consequences of an identified risk.

In the banking context, credit risk is the most common, because of high number of cases of loan defaults by customers that lead to ‘bad debts’ being written off; this subsequently has the potential of making the entire bank collapse due to inability to honour customers’ right of payment on demand. This can lead to a spiral effect, which has the potential of crippling the entire banking system of a country. Usually the risk management strategy that is commonly applicable in the banking system is setting of a minimum capital requirement which will control and limit a bank’s lending and credit creation ability (James, 2003).

 

It is critical to note that the International Organisation for Standardisation (ISO) has set principles and guidelines that all risk management mechanisms should follow. These principles and mechanisms include; transparency; flexibility; inclusiveness; responsive to changes within; form the decision making process of an organisation; capacity to deliver continued enhancement and improvement within an organisation; periodically readjusted; factor in human issues; ability to create value for the organisation and also form an integral part of organisational processes (Keller et al., 2006). These principles and guidelines are reflected in all properly structured and developed risk management plans.

 

2.2 Importance of risk management

 

Referring to the studies conducted by Hillson and Murray-Webster (2007) risk appetite and tolerance are usually high among ambitious individuals and aggressive business organisations, these traits among this set of people is backed up by their “go-get” attitude. This is due to the common phenomenon that the higher the risk the more returns or rewards a venture is supposed to generate. This, therefore, means that individuals, as well as business organisations, will always be ready to undertake high levels of risk with the expectation of remarkable outcomes or handsome returns (Hallenbeck, 2006). However, in the likelihood of unforeseen circumstances the aforesaid individual or business organisation may suffer massive losses in the case that the venture is marred with unavoidable circumstances or events that hinder the realisation of the expected outcomes. It is due to this fact that James (2003) wrote that a wise investor will always factor in the risk factor in any venture that he or she undertakes and adopts necessary measures or strategies that will foresee the investments made are less impaired or totally safe from the identified risk. Thus, the main importance of risk management is to safeguard against unnecessary losses that can be accrued due to lack of implementation of mitigation measures.

Secondly, in any business undertaking or project there are usually numerous stakeholders who have pulled together their individual resources so as to invest in the single project and in order to get the investors’ confidence it is usually critical to implement a risk management mechanism, which will guarantee the capital security of the investing parties. Siems (1996) stated that as a part of any business plan it is usually crucial to spell out the potential risk of the project and how well the proposing party is ready to handle the risk identified. This is usually meant to gain the trust of the prospective investor by making an assurance that the money invested into the project is safe, and chances of making losses are minimal.

The process of risk management can be used to evaluate different investment options, so as to establish the best option that offers a considerable degree of risk with a highly excessive return (Hallenbeck, 2006). Through analysis, investors can look into different options gauging them on their level of risk, mitigation tactics and the likely outcomes, the result of this analysis will then influence the investment decision (Moteff, 2005).

 

Implementation of a proper risk management mechanism will ensure the attainment of projected sales level or successful completion of a project. This further guarantees that the project will generate adequate cash flow throughout the entire period thus enabling the attainment of the stipulated short term and long-term objectives.

 

Proper risk management strategies can identify to a business organisation when to invest in a particular line of business, which has less risk at the time and high returns, and also when to pull out or reduce investments in that particular line of business. This gives the business organisation an opportunity to take advantage of a seasonal business environment, which can at times have a high risk and low returns in a particular period, and vice versa (Hutto, 2009). For example through a proper risk management strategy a hotel business will be able to know when to pump in more capital into the business (during tourism peak season), and when to reduce investment by lowering the staff number or other operational expenses. This prevents the hotel from incurring losses during the low peak seasons.

Mostly in building construction projects and financial investments, risk management influences the decision-making process and also how different stages of the projects can be approached. This is because risk management will highlight on certain settings, conditions or environment which have high propensity of creating uncertainty or negative outcome. Relying on this information decision makers change how they normally approach things so as to avoid triggering situations that generate a negative outcome for the project.

According to the writings by Gorrod (2004) it is vital to note that among the significance of implementing risk management strategies in projects or in business ventures is to satisfy the set criteria which are required before certain undertakings are adopted; the potential risks should have been identified as well as their mitigation tactics. At times, risk management is adopted so as to ensure a project or a business venture does not in any way violate certain rules or standards that can jeopardize the position of the project (Borodzicz, 2005). For example, for banking institutions they have to establish risk management strategies that will ensure their clients are able to honour their loan repayment schedule on time, which will further guarantee them a steady cash flow that will enable them to pay for the normal operational costs and also honour customers’ cheques, as well as payment demands for their deposits (Hallenbeck, 2006).  By securing a steady cash flow, the banks are able to maintain the minimum capital requirement that is stipulated by the Central Bank. In case, a bank ignores to set a comprehensive risk management strategy, it exposes itself to various disadvantages such as loan defaults by the customer and in order to cover for the shortfall they will have to lower their minimal capital requirement at the central bank, which is a violation of the minimal capital requirement law and also an infringement of the agreement of the Basel Committee that prescribed on the minimal capital requirements for all banks internationally.

Lam (2003) lauded that the Basel regulations have aided in customer protection and in order to ensure strict compliance of these regulations, the UK government ensures that banks provide evidence of strict compliance to these requirements so as to get government tenders and also to participate in major businesses. The Sarbox regulations (derived from the United States’ Sarbanes-Oxley Act of 2002) which require that public companies, their management and also accounting firms adopt enhanced reporting standards for financial statements has also helped increase investors’ confidence in corporate financial statements. The UK government highly emphasise on the implementation of these key regulations in all major commercial enterprises because they are highly effective risk management measures that accrue a lot of benefits to the firms as well as the customers.

2.3 Project Risk Management Process

Referring to the studies conducted by Tapiero (2004), project risk management is a process that follows five distinct steps that begin with identification of risks then assessment of the risk, quantification of the risk identified, followed by risk response planning and lastly, monitoring and controlling the identified risk.

2.3.1 Risk identification

This is the initial stage of risk management, and events are identified, which if triggered, will lead to considerable damage or loss. The identification process is two ways it can either identify the problem itself or the source of the problem. When identifying a risk from the source point, it is critical to acknowledge that the source can either be internal or external to the organisation and these may include; the surrounding climatic condition, the organisation’s workforce or stakeholders of the organisation or project. When identifying risk as the problem itself, this entails identifying the underlying threats such as loss of capital investment, mishandling of vital and confidential information or threats arising from opposing groups or legal actions (Van et al. 2004).

In reference to the studies completed by Rendlemen, (1999) there are various methods of risk identification and key among them include; common risk checking in a particular industry, which is identifying list of a business organisation from a list that is already available and contains risks common in the pertinent industry. The second methodology of identifying risk is through taxonomy-based risk identification whereby risks are identified from feedback of filled questionnaires (Hillson and Murray-Webster, 2007). In the taxonomy-based risk identification methodology, similar questionnaires are distributed to numerous participants and they are each asked to classify risks in all the different practice areas. The classified risks in each questionnaire are then compiled to identify the most common risks in all the practice areas of the financial sector.  Thirdly, there is scenario-based risk identification whereby different scenarios are created, and in case a certain event leads to unintended scenario, than that event is identified as risk (Hillson and Murray-Webster, 2007). Fourthly, there is the brainstorming methodology, which is mostly used by start-ups or in scenarios that are new and do not have already identified set of risks. Through brainstorming workshops, participants bring forth likely risks, which are then debated upon by others and if they jointly agreed upon then it is listed as a risk. The fifth and also the most common methodology of risk identification is objective-based risk identification which denote an event as risk if hinders the attainment of the set project or organisational goals.

Stoneburner et al. (2002) stated that the methodology of risk charting is the most comprehensive and reliable since it integrates all of the above methods. Risk charting can be done using different approaches, but commonly it is done by listing resources that are at risks then the threats to the resources and factors that can either catapult or lower the risk levels. Alternatively, the threats can be assessed first and then resources that are likely to be affected and the consequence of each identified risk. For example in financial investment; the customer or fund manager may identify risk through risk charting by first enlisting possible scenarios that may cause a drop in value of share price such as bankruptcy law suit against a bank, death of a key management official and enactment of government regulations that is unfavourable for the normal operations of the bank (Hillson and Murray-Webster, 2007). After enlisting the threat and possible scenarios that may cause, the next step is to identify the impact of the fall in the value of share price, which might be the bank going under receivership, customers clearing their accounts or investors dropping their share holdings of the bank.

2.3.2 Risk assessment

Once risks are identified they are analysed to establish the extent of their impact and the chances of occurring. The extent of the impact of the risk can be easily measured in the case of a collapsed building or loss arising from the exchange rate, but in other instances, it is usually impossible to measure.

Risk assessment is usually conducted to ascertain the viability of a particular investment option; for example, a more risky investment is not advisable for a risk averse investor. In projects such as building construction, risk assessment mainly entails evaluating whether the construction projects can be successfully completed, whether the building can withstand harsh conditions such as flooding or earthquakes and also if they are likely to be a high number of interested tenants of occupants of the building under construction. However, it is pertinent to note that the riskier an investment is the more returns or rewards it is likely to gain in the markets, this according to Moteff (2005).

Risk assessment is also used by the management team to predict on a company’s future performance. For example, if the levels of risk pertaining to liquidity, operational or credit, are minimal the management will be right to assume that the business will survive even in the future.

Lenders whom are referred to as buyers in the financial market do use risk assessment reports before investing in listed companies, so as to evaluate whether the company is likely to repay their investment or not. According to Gorrod (2004), risk assessment is also another way through which companies can carry out stock valuation and predict price movements in the future.  Through risk assessment, companies can implement necessary measures to mitigate the effects of such risks and in the long run lure more investors to invest in the company’s stocks and shares.

However, according to the studies conducted by Flyvbjerg (2006) it is rather difficult to assess risks such as geopolitical risk or economic risk as these risks are out of the control of the financial market and hence neither can they be controlled or measured.  Political and economic risks happen at unexpected times, which could be due to various reasons that include natural calamity like the floods or earthquakes, terrorism scare or attacks and even economic meltdown or recessions.  Consequently such risks are hard to measure, but necessary steps have to be adopted to mitigate their effects.

2.3.3 Risk quantification

Altemeyer (2004) stated that risk quantification is a process whereby risk is measured or described as a quantity, and currently there are various theories and formulas that try to quantify risk but the most commonly applied is the composite risk index, which is obtained by multiplying the probability of risk occurrence and the impact of risk event.  Both variables are presented on a scale of 1 to 5, and a smaller number represents either low chances of occurrence or low severity of the impact of the risk occurring and a higher number on the scale represents either higher chances of occurrence or maximum severity of the impact of the event. It is, however, of the essence to note that quantification of risk is limited and usually different techniques of quantification apply in different fields or contexts.

 

For example, Borodzicz (2005) stated that there are two generally applied and comprehensive techniques for measuring risks at the stock market that can also be applied at the general business field, and they include; the standard deviation method and the co-efficient variation method.  The standard deviation method measures the dispersion from the mean or expected cash flow; it is always prudent to incorporate the risk premium rate to arrive at the rate that it is to be used i.e. risk premium rate will be added to the risk free rate to get a composite rate that can be used to discount future cash flows, significant to note is that the higher the standard deviation the riskier the stock is assumed to be.  The co-efficient of variation is a relative measure of risk because it considers the risk against the expected cash flow it is used to compare stocks of unequal values, the higher the co-efficient of variation the higher risk of the project.

With regards to the stock market, Jensen (2009) stated that investors can use the historical volatility of interest rates to measure its risk, and there is also other comprehensive ways of which this can be measured, and it involves using mathematical models to forecast interest rates scenarios.  Credit risk is easily measured from the credit rating agencies that give credit rates to companies and their stocks.  Liquidity risk can be assessed using the bid-offer spread, the less the spread is the less risky the stock is and when the spread is long the more risky the stock is (Lintner, 2005).

Operational risk can be calculated using three different approaches that include; standardized approach, basic indicator approach and the advanced measurement approach. Both the standardised and basic approach assesses capital requirements based on revenues while the advanced measurement technique uses risk measurement techniques which have been established by the industry.

 

Other example of risk quantification in project management are given by Kruger et al. (2012) who stated that in a construction project the risk of a building falling or a fence falling is quantified by adding up the total amount used to put up the fence or the building i.e. material used plus the labour fee for workers contracted.  In health, risk is quantified by adding up the total number of people who will be affected, the total cost of treating each of them, and also the productive hours lost by the patients while they were suffering from the health risk. Security risk such as burglary is quantified by adding up the value of the goods that will be stolen, value of the damage to property, cost of re-constructing the damaged property and harm or loss of any human life during the burglary.

 

The key element of risk-based frameworks for allocating resources is that starting point is risk not rules. Risk-based frameworks require regulators to begin by identifying the risk that it is seeking to manage, not the rules it has to enforce. It is the business’s risk appetite that determines which risks to treat or tolerate. Based on the identified risk universe, the organization then determines its risk appetite through input from senior management, the board, and the business owners. Tolerance levels must be defined for a period of time that takes into account the loss of funds, functions, or the ability to deliver services to the market. It is from here that the company determines whether the risk is significant in terms of its appetite or not.

 

2.3.4 Risk response planning

 

After performing the three steps, the next stage is drawing up a mitigation plan for the risk so as to reduce its chances of occurring, the impact of the risk and if possible total elimination of the identified risk. Alternatively, Alexander and Sheedy (2005) stated the if the three options are not viable then the risk can be transferred to another party through outsourcing the affected business process or the organisation can as well acknowledge the chances of occurrence and the impact of the risk and the factor it on its budget or future plans.

 

In the writings by Bent et al. (2003) they are quoted saying that risk avoidance is the most effective solutions for all risks but without taking any risk then, an investor or business organisation should not expect any profit. Risk avoidance is usually done by not carrying out certain activities that might trigger risk from occurring. According to BebchTaiwan 2008, risk reduction is done through adopting certain strategies that reduce the impact and probability of occurrence of risk. For example, performing proper electrical wiring and installing fire extinguishers within a building will reduce the chances of fire outbreak and also the extent of damage in case a fire outbreak occurs. With regards, to risk sharing Roehrig (2006) stated that risk can be shared through outsourcing or insurance whereby the third parties, which are business process outsourcing centres and insurance companies, will both share in gains as well as a burden of loss with the business organisation. With regards to risks that cannot be shared or transferred; they are simply retained and at times, it could be because of cost of insurance against the risk which is much higher than possible losses that can be accrued in the event of risk occurring.

 

2.3.5 Risk monitoring and control

After the implementation, of the risk response plan; the subsequent step monitors the efficiency and performance of the risk management mechanism. This stage will actually check whether the response plan that has been implemented lowers the probability of the risk occurring and also whether if the risk occurs the severity of the impact will be much lower or not. If inefficiencies are noted within the response plan, then control measures are undertaken so as to obtain maximum performance of the risk response plan.

 

Covello and Allen (1988) noted that the initial risk response and planning is usually never adequate for risks being faced and more so risk that will be faced in the future. Therefore, risk monitoring and control should be frequently reviewed so as to ascertain whether the initially implemented risk control measures are achieving the desired results or not. Secondly, to examine any changes of risk level within the environment and this is usually common with information risk whose level changes immediately there is new information.

2.4 Why it is necessary for risk management iteration in the project life cycle

In an ever evolving environment where nothing seems to stay constant, and there are always new trends cropping up it is totally unconventional to maintain a risk management strategy for more than a year or two without reviewing the plan and making necessary amendments. Specifically, in project management there are different cycles which call for different risk management strategies, and hence in project life cycle, risk management strategies are usually reviewed and updated regularly. Considering different contexts, the review of risk management plan may be facilitated by; a) introduction of new laws, b) amendments of existing laws, c) introduction of new products and services, d) difference in the way work is done i.e. from manual to use of information technology, e) climate change, f) introduction of new personnel into the project, g) change of the objectives of a project and h) change of source of finance or amount of resources allocated or required for the project. These new issues cropping up according to Hillson and Murray-Webster (2007) will undoubtedly influence or change the source of the problem, as well as the problem itself, and expectedly the strategies of risk mitigations will have to be reviewed in order to factor in the new severity of the risk and well as the probability of occurrence.

Keller et al., (2006) in their studies documented on iterative risk management framework to articulate options in a project that are bound to be affected by climate change. In their studies, they presented the below illustrative figure which demonstrates on the iterative nature of the climate policy process. The figure shows two quarters where decisions are made, and the other two quarters represent the decrease in severity of the impact of the risk and reduction in the probability of occurrence for the risk. The arrows around the circle represent a range of outcomes and decisions that undertaken during a project life cycle.

Source; http://www.ipcc.ch/publications_and_data/ar4/wg3/en/figure-3-37.html

 

From the figure, it can well be summarized that the iterative risk management framework has two key stages in each project life cycle whereby the existing environment is observed to identify changes and their impact on the project. The change could be on the surrounding weather pattern or the demographics of the pertinent population. The second stage after learning environment is to act on the risk management plan and then implement the changes learnt to the measures that had earlier been adopted for managing risks. This process as stated by Gorrod (2004) is repetitive, and it is usually conducted in intervals that depend on the type of the project and also the concerned environment for example social, political, technological or economic environment Gorrod (2004). The iterative risk management plan is beneficial from the sense that new sources of problems, as well as problems, are factored into the plan, and even new ways of risk mitigation are factored into the ever evolving plan. Additionally, with an iterative risk management plan the risk mitigation measures are always up-to-date and ready to tackle any new challenge arising (Cooper, 2010).

 

Referring to the studies conducted by Bent et al. (2003) they gave case based examples of iterative risk management plan in projects of different fields. For example in a construction project, there is usually a risk management plan pertaining to the health and safety of the workers, and in regards to this plan usually recommends that all workers within the site to wear gloves and a construction helmet. However, in case there is change in construction equipment/ materials or the existing laws that govern construction projects that now require all workers to be issued with protective eye glasses, the iterative risk management plan will have to factor in these changes. The adoption of this measure will protect workers against any harmful danger on their eyes that may arise as a mishap of the material used or the equipment. Alternatively, as stated by Gorrod (2004), the issuance of the protective eye glasses to the work force will be to protect the project from being shut down by the authorities due to failure of implementing the new law that requires all workers in a construction site to be issued with protective eye glasses.

 

According to Dorfman (2007) the most iterative risk management plan is in farming projects, which is necessitated by the ever changing and unpredictable weather patterns.  For example, an iterative risk management plan against heavy rainfall is usually revised when weather forecast predicts low rainfall levels in the future, the measure adopted in this case is a reduction in the insurance premium paid periodically (Grace and Robert, 2003). Alternatively, an iterative risk management plan against drought will also be revised incase the weather forecast predicts adequate future rainfalls, and in this regard, the farmer may even scrap off the insurance against crop failure due to drought.

 

With regard to the banking industry; banks are always faced with credit risk that can eventually lead to bankruptcy and closure of the entire bank, which can as well affect the financial market and the economy at large (Hillson, 2007). It is for this reason that the central government through the central bank always implements measures such as the minimal capital requirement to protect against such risk. The establishment of the minimal capital requirement is usually determined by the prevailing economic situation. Grace and Robert 2003 state that during robust economic times, the minimal capital requirement is usually lowered, and during harsh economic times, the minimal capital requirement is usually increased so as to further cushion banks against credit risks. Banks also reflect this in their iterative risk management plan (Grace and Robert, 2003). For example, when the minimal capital requirement has been lowered the probability of occurrence as well as the impact of the severity of the risk, is usually lower and hence banks lessen the conditions of borrowing to their clients. However, when the prevailing economic condition is rather harsh, banks revise their iterative risk management plan by introducing tougher conditions for borrowing customers; this measure is undertaken so as to protect the banks against customer defaults on loans borrowed (Bollerslev et al. 2008).

 

2.5 Enterprise Risk Management

 

Referring to the studies conducted by Tysiac (2012), Committee of Sponsoring Organisations of the Treadway Commission (COSO) has been described as a voluntary organisation in the private sector that is predominant in the United States, which was established in 1985 to investigate and issue out recommendations on fraudulent corporate financial reporting. Its key mission is providing professional guidance to the management of enterprises and state authorities on vital functions pertaining to financial reporting, fraud, enterprise risk management, internal control, business ethics and organisational governance (BebchTaiwan, 2008). In respect of its mission, COSO has established an internal control framework that can be used as a reference point by government bodies and business organisations when conducting an assessment of their own internal systems.

 

In respect to enterprise risk management, COSO developed a model which can be applied by the management of an organisation when they are trying to assess and improve their enterprise risk management. In this model, Hopkin (2012) noted that risk has described as scenario or event that has potentially negative impact in the aforesaid enterprise. The severity of the risk can be either felt by the enterprise as a whole, the capital and human resources, services and products offered by the enterprise or the end-users of the enterprise products and/ or services. Moreover, the impact can even affect the external environment, market or the surrounding community (BebchTaiwan, 2008).

 

With regards to the banking industry, Nicholson et al. (2005) stated that enterprise risk management considers collective risk in this industry, which include operational risk, market risk, interest rate risk and credit risk. Consequently, the COSO enterprise risk management model prescribe that every identifiable risk can have a pre-established plan to tackle the possible consequences that may arise as a result of the risk occurring.

 

Alberts et al. (2008) noted that, in 2001, COSO devised an integrated framework for enterprise risk management after cases of numerous failures and business scandal of giant corporations, which heightened the advocacy for effective corporate governance and comprehensive risk management. These efforts led to the enactment of the Sarbanes-Oxley act that emphasised to public enterprises on the establishment of internal systems of control that are not only certified by the enterprise’s management but also an independent auditor who confirms the effectiveness of the internal control system (Hillson, 2007). The latest edition of the COSO enterprise risk management includes an integrated framework that is broader and seeks to ensure that the established internal control system that can provide reasonable assurance to the enterprise on compliance with relevant laws and regulations, reliability and validity of its financial reporting, efficiency and effectiveness of its operations and attainment of its overall mission and goals (Cooper, 2010).

 

Crockford (1986) stated that the enterprise risk management-integrated framework has eight key components that aim at addressing the ever increasing demand for risk management in enterprises. The components include;

  • The internal environment, – this in the banking institutions sets the tone how risk is perceived, and the risk appetite.
  • Objectives setting-this prescribe that the enterprise should first establish its main objectives before potential events can be identified as risks;
  • Event identification- this component guide on risk identification both in the internal and external environment;
  • Risk assessment- risks are assessed to determine the impact as well as the probability of occurring;
  • Risk response-the management will devise appropriate measures and mitigation tactics so as to lower the impact or eliminate the chances of the risk occurring;
  • Control activities-procedures and policies are developed and enforced so as to ensure the risk response achieve its objectives;
  • Information and communication- the integrated framework prescribe for information to be identified and relayed to all concerned parties.
  • The monitoring component in the integrative frameworks requires periodical appraisal of the risk response plan and modification to areas that are perceived outdated by events or ineffective.

 

It is beneficial to note that the COSO enterprise risk management-integrated framework totally relies on human judgment and, therefore, it is prone to human errors that can be as a result of bias and lack of informative information. However, the extent of human errors on the decision making process regarding risk management is minimized by the roles played by internal and external auditors who collectively assess the effectiveness of the control system established within the framework (Hubbard, 2009).

 

2.5.1 Office of Government Commerce (OGC)

The Office of Government Commerce is a department under UK’s central government and it is aligned to the Efficiency and Reform Group which is part of the Cabinet office and it mainly operates through the executive agency of the central government procurement service. The main mandate of the department is to offer support through negotiation of efficient services and provision framework, and also through policy and process guidance for the procurement and acquisition process of government enterprises. The primary goal of the department is to gain value for taxpayers’ money and also guarantee the taxpayers optimum delivery of services (Porteous and Pradip, 2005).

 

The OGC has models that support best practice of programme and project risk and service management. One of these models is Management of Risk (MoR), through which the department offers best practice guidance to all UK organisations on risk management. The best practice guidance covers the key concept of risk, risk identification, ownership of risk, risk assessment, risk appetite, response to risk, review and reporting of the risk management (Wideman, 1992).

 

Summary of the chapter

 

This chapter has presented a review of different scholarly works that touch on various subjects relating to the objectives as well as the topic of this dissertation. From the review, presented above among the notable facts is that the best method of responding to a risk is by avoiding the risk; however, this is not possible in a situation whereby either the individual or business organisation wishes to generate a substantial amount of profit. In the case of projects be it financial investment projects or building construction projects, some certain risks are taken up by the project managers because they have already being identified and equal measures have also been implemented to reduce their likelihood of occurrence and severity of impact. Secondly, in the risk identification process it is indispensable to acknowledge the difference of what can be termed as uncertainty and what can be termed as risk. Thirdly overemphasis on the risk management process can hinder the successful completion of a project or even kick starting of the project. For example, when undertaking a building construction project along a coastline the risk level are usually high because of likelihood of unforeseen natural calamities such as earthquakes, tsunamis and tornadoes, among others, and if the project manager overemphasis on putting up necessary safeguards against such calamities it might end up delaying the entire project and consumer more resources reducing even the expected return of the project. In financial investment projects, overemphasis on risk management process may lead to increase in capital requirement, which will translate to higher interest rates and low uptake of loans and generally minimal return on financial investment projects.

 

  1. Chapter Three: Research Methodology

 

This chapter details the research methodology employed in this study. It is widely noted that most researches are usually carried out through primary and secondary research. However, in this research only the secondary research method will be applied because of abundant and reliable information that is available on numerous scholarly literatures, articles and internet sources. In secondary research or research based on literature, information is usually gathered from multiple academic sources such a valid websites, textbooks and journals usually from sources such as Business Premier and Emerald. The choice of secondary research for this paper was informed by the fact that the topic was initially finalised after a thorough secondary research, which helped in devising the research objectives, and aim of the entire study. The first part of the secondary research has been displayed in the literature review section. Saunders et al. (2007) cite that secondary research is advantageous because the data that are sought after already exist and the researcher can evaluate its validity before using them.

 

3.1 Research Philosophy

 

This piece of research will be from a positivist point of view. This philosophy has been selected as it encompasses building bridges between risk appetite/ tolerance alongside risk management in the banking industry and the investment banking industry. Previous studies, research and theories, are also to be used in order to acquire further knowledge, ‘As knowledge that is arrived at through the gathering of facts provide the basis for laws’ (Robson, C., (2002). The purpose of this perspective is to establish ideologies and ensure the objectives of the project are achieved.

 

Additionally the research will apply the use of epistemology Interpretivism (analysis of the meaning of peoples’ action as well as others) and critical realism. The philosophy of interpretivism is beneficial since it advocates for equal consideration of divergent opinions from various scholarly works, rather than perceiving such divergent opinions to be inaccurate data. In the adoption of the philosophy of critical realism, the researcher will ride on the fact that reality is a creation of social factors that are surrounding him, which cannot be understood independently from the surrounding social factors (O’Leary, 2004).

 

3.2 Research Approach

 

The researcher collected various materials having information of risk appetite and risk management from various Taiwan scholars. The materials that were not relevant to Taiwan were eliminated. The online databases from various Taiwan financial institutions and banks were collected. The materials that touched on the two banks were given priority.

 

The inductive approach aims to condense extensive and varied raw text data into a brief, summary format. Secondly, to establish clear links between the research objectives and the research findings.

 

3.3 Data Collection

 

In relation to the data retrieval methods, the use of scholarly works, journals and other literature will be the only means of gathering data, which will help in answering the research questions and also attaining research objectives. Data collection will only be limited to a source of literatures that have been used in the module or which are particularly related to risk management, project management, practices in the banking industry and also in the investment banking industry.

 

This form of data collection will require less time compared to when both secondary and primary data collection processes are conducted. The reason is that the researcher will only limit his data collection to libraries, cyber cafes or on personal computers unlike when carrying out primary research, which would require the researcher to conduct actual field research.

 

3.4 Qualitative vs. Quantitative Approaches

 

There is a distinct difference in the use of qualitative and quantitative research approaches as both methods are used for entirely different purposes. Quantitative research uses mathematical and statistical methods to interpret and evaluate the results of data collected using tools, such as questionnaires. This suits the belief of Fred Kerlinger who stated “There’s no such thing as qualitative data everything is either 1 or 0” (Creswell, 2002), this can be perceived to be true as quantitative research involves the analysis of numerical data. It is significant to note that the quantitative approach will be applied in this study. Noor (2008) stated that quantitative analysis of data is a process that is based on the amount of data collected from the identified materials such as financial statements of banks and investment banks. This information is often accurate and not prone to human manipulations.

 

Qualitative research seeks out the why, not the how of its topic through the analysis of unstructured information (Ereaut, 2007). It is an approach, which one could say, takes insight into human behaviour, as human behaviour is significantly influenced by the setting in which they operate or occupy in; thus one must study that behaviour in those situations. Research must be conducted in the setting where all the contextual variables are operating (Marshall, 1980). Under qualitative analysis Neil (2007) states that qualitative data analysis is the analysis of data which is based on meanings spoken through words or personal expressions from the respondents. Qualitative analysis of data is one of the major methods for data compilation and interpersonal interviews.

 

3.5 Research Strategy

 

It is pertinent to note that, in a dissertation, the research methodology is particularly significant since it validates that the secondary research performed is valid and trustworthy. The research strategy adopted for this study as already noted in this project will primarily seek to gather information from articles, magazines, journals and previous research that were carried out on the research topic (Valenzuela and Shrivastava, 2009).

 

Only quantitative data collection techniques were exploited to benefit from strategy strengths and weaknesses (Wilson, 2004). Hence, the combined implementation of techniques helped to test assumptions in literature about the impact risk appetite/ tolerance and also risk management in projects as well as in the banking and investment banking industry.

 

3.6 Research method

 

Another aspect that is of immense significance in this research methodology is the research method, which shows methods that the researcher will adopt to answer the research objectives or questions. There are types of research strategies that can be employed in conducting a research study. These include experiments, case studies, survey, theoretical perspectives, cross-sectional and longitudinal studies. It is imperative to examine the case study method and the sampling method that will be applied in this research. SinoPac and E.Sun Banks were used as case studies.

 

The research entailed investigating risk management and risk appetite from various journals and articles. More elaborate explanation on the nature of the case study as a research strategy was given by Miles and Huberman (1994) in whose view case study represents a way of collecting, organising, and analyzing data’. Secondary method which involves collecting the secondary information regarding a give phenomenon was selected.

 

In this research, the research will use a case study of a bank and also of an investment bank that majorly deals with the selling and purchase of stocks and securities in the stock exchange market. Through the case studies, the research will investigate the level of risk appetite and tolerance within each firm and also investigate measures in place for risk management. After conducting individual investigation on the two institutions chosen as the case examples, the research will embark on making a comparison and contrasting the findings from the two sides so as to establish the similarities and differences. It is pertinent to note that the institutions financial records and also management will be used as sources of data for the research purpose.

 

Secondly, the research will employ the sampling method so as to validate some of the data collected. For example, it will not be sufficient to rely on the data collected from the two institutions chosen as case examples without confirming or validating the information. This is because the two institutions are capable of manipulating data and misrepresenting information to suit their own needs or meet certain conditions (Neil, 2007). Thus, the research will sample a few individuals such as banking consultants, an auditing expert, an independent stock analyst and project management consultants. Because of the high number of such individuals in the Taiwan, the research will use the sampling method to select them without any specifications.

 

The sampling method of choice in this case is simple random that considers a certain size. All the subsets in the sample have an opportunity of being given an equal chance of participation. This, therefore, implies that every one element in the frame is given equal probability in participation. There is no subdivision or partitioning of the frame. Pairs and also triples if they exist are also accorded equal opportunities. This leads to the minimization of bias, in addition to the simplification of, the result analysis process. The variance that may exist between results on an individual capacity in the context of the telephone conversation can be the best indicator of the variance in the entire population. This, therefore, also leads to the simplicity in the estimation of accuracy that the results may have.

 

There is, however, a high possibility of vulnerability to sampling errors in the use of this Sampling method. This is attributed to the randomness in the process of selection that may lead to a sample that may not reflect the actual make up that is evident, in the two industries. There is also an aspect of awkwardness? That is associated with this sampling method, as it might also be tedious if sampling is intended at populations that are unusually large.

 

3.7 Validity and Reliability of Results

 

A debate about the findings of the preceding literatures on risk tolerance/ appetite and risk management in the banking industry, as well as the investment banking industry, inevitably includes a discussion of research, normally referring to the way in which the data were collected”. This research being a phenomenological, all questions are related to theoretical characteristics discussed in the literature review carried out. The process would, therefore, be accurate in collecting, analyzing and sampling data; hence the validity of result would be quite high. In addition, through the sampling method the researcher will identify appropriate external parties to call so as to confirm some of the date presented from different sources (Smith, 1975).

 

3.8 Research plan

 

The plan involved with carrying out this research will be comprehensible. This is because it will be only conducted through secondary research meaning that the information required is already there. What will be required from the research are; adequate preparation with regards to collection of the required information, analysis of the information gathered and documentation of final findings.  The documentation of the final findings will be presented in a manner that answers the research questions already enlisted in the first chapter.

 

 

3.8.1 Research plan and time frame

Activity Time Responsible person Expected outcome Critical assumption
Developing research plan By  July 2012 Researcher Research plan Proposal has been approved
Developing sources of data By July  2012 Researcher Data sources Expected sources of data have been gathered
Reviewing sources of data By July 2012 Researcher Reviewed source Data sources developed in time
Developing analysing strategy By July 2012 Researcher Analysing strategy Strategy developed
Collecting data or reading through secondary sources By July 2012 Researcher Data/findings Data was correctly gathered
Analysing data and interpretation By July 2012 Researcher Analysed data

Interpretations

Data has been collected
Writing the key findings and answering research questions By July 2012 Researcher Complete chapter four and five of the dissertation Analysis and interpretation was done correctly
Submitting final report in hard and soft copies By August 2012 Researcher Hard and soft copies of dissertation The dissertation had been defended

 

  1. Chapter Four: Case Study Analysis

 

The secondary research was conducted with the different tools described in methodology that helped in revealing the influences of risk appetite and tolerance on E.Sun Bank, SinoPac Banks and other Taiwan banks. The findings of the research, based on the articles and other materials presented are as follows.

 

Restating statement of the Problem

 

Risk is faced by Taiwan banks, as with most businesses, because of their ability to anticipate the future correctly. Bank behaviour is based on given and expected perceptions of some key variables.  Specifically, the researcher needed to take into account the considerable forms of risk to which Taiwan banks are exposed. Risks were classified as Interest rate risk, Exchange Rate Risk, Credit Risk and Spillover Risk for easy assessment. This was to explore the following research objectives and questions.

 

Objective: To understand how risk appetite and tolerance influence decisions making in organisations taking E.Sun and SinoPac Banks as a case study.

 

Research Question 1: What are the benefits of a formal risk management in Taiwan Banking Industry?

 

Research Question 2: What is the impact of risk appetite on business conduct under the current economic circumstances?

 

These research questions are not mutually exclusive and so the importance of analysing each separately.  A Taiwan bank faces an interdependent risk function.  For example, a risk dimension in the area of interest rates might also have implications for exchange and credit risks, and the latter risks might influence the former. For each of these risk categories, the key determinants involved can be identified and for expository reasons, therefore, it is convenient to proceed as if these risks were independent of each other.

 

Data collection

The data was collected from various articles and journal having information of risk management and risk appetite. Online dataset of the two banks and other secondary materials relevant to the study were also collected. Among the materials were also information that were outdate or irrelevant to the study. This resulted to a voluminous information and hence its reduction to manageable levels.

 

Initial coding and data reduction

Secondary materials and information available from scholarly works, journals and other literature were collected. There was a need to reduce data to manageable levels and relevance (Camilla, 2003). Initial coding was significant in the process of analysis since it provided names for pieces of data. These codes comprised of words, expressions or other portions of data relevant to the study (Caldwell, 2003). The initial coding helped in classifying the risks under Interest rate risk, Exchange Rate Risk, Credit Risk and Spillover Risks. All materials containing or having more information on each risk were grouped together. The key words were:  risk appetite, tolerance, decisions making and banking (Michael et al, 2005).

 

The researcher began with a collection of volumes of information from articles and other secondary materials on each risk and gradually reduced them until each of them represented a specific concept. These concepts were essentially units of meaning (Kabala, 2005). Once an understated coding had been finished then researchers grouped up the codes with common meanings that are linked to risk appetite and tolerance in Taiwan Banks with E.Sun Bank, SinoPac Banks on consideration. When varying terms were used to the same concept, the most appropriate label was used as a name for the concept (Donald, 2005). Instead of coding line-by-line or sentence-by-sentence, several researches code following paragraph-by- paragraph while there are those who search for meaningful statements in the text (Camilla, 2003).

 

Even though open coding looked straight forward, at the start, it was overwhelming. Its aim was to generate as many codes as possible which will fit the data. As the coding was be in the process, the study made comparisons of various incidences, and it was essential to note that some codes were likely to recur more than others (Camilla, 2003). There are also other codes that collapsed that gave room for the development of categories.  The study expected to code and record data during this substantive level, especially from the articles and other journals (Caldwell, 2003).

 

During selection of words for coding in open coding, it was essential to stay close to the research topic as possible. Picking words that were reflective of what was happening in E.Sun Bank was crucial.  Hence such words were avoided since they tend to drive the analysis, more like a theoretical framework (Donald, 2005). As the open coding continued, codes were compared constantly and grouped gradually and systematically into more abstract categories (Caldwell, 2003).

 

With the support of other related banks and materials, each bank was analysed separately using the secondary materials. All the information pertaining to risk appetite and tolerance and decision making in each bank was examined.

 

Analysis of E.Sun and SinoPac Banks

Project risk management according to Robert (2009) is to plan, identify, analyse, respond, and control risk factors throughout the risk management process. This is done by planning, identification, qualitative risk analysis, quantitative risk analysis, risk response planning, and risk monitoring and controlling. According to Shanks (2003), many scholars argue that these risk management core competency skills are most salient in their job as bank Risk Manager.  All of these are beneficial to succeed in any bank risks that they are facing.

 

In the analysis, it was essential to identify the top five risks managers perceive most salient in SinoPac and other banks and affect decisions-making in any bank. According to Hallenbeck and Lerche(2006), most of the banks consider credit, interest rate, foreign exchange and liquidity risk as the most significant risks that must be controlled. The risks mostly affect decisions making in the bank.

 

After reducing the available information and restricting it to risk appetite and tolerance and decision making in E.Sun and SinoPac Banks, four general conclusions can be drawn from this research:

 

  • Risk management in E.Sun and SinoPac Banks

 

E.Sun and SinoPac Banks managers believe that it is necessary to form a correct risk management concept, by learning risk management concept of world. The two Bank managers consider risk management as an important part of their job.  However, they have some misleading ideas of risk management in the past which make it take a long time’s effort to lay advanced and correct risk management concept in the minds of bank staff (Michael et al, 2005). Despite that many Taiwan Bank managers have realised the importance of bank risk management theoretically in mind, many banks in practice and operation still pass on the ideas. First that operation scale is too much emphasised so risk management is put on the opposite side of business development mistakenly, with the thought that risk management is to make business staff in trouble, and without considering risk control same material with profit creation (Robert, 2009). While some risk, managers simply think that risk control means less business and avoids risk bearing by denying business, which cause the failure of many available business and the decrease of anti-risk ability of banks. In recent years, both E.Sun and SinoPac Banks and other Taiwan banks are trying to set up correct risk management concepts. These efforts will predictably last till the scientific risk management concept is rooted in every staff’s mind of banks.

 

  • Credit risk management and how the two banks deal with it
  1. Sun Bank

In the aspect of credit risk management mechanism, the bank managers is unanimous in realising that credit bank risk management is a systematic strategy, which needs the coordination of many factors, in order to reach the goal of lowering the bank risk (Donald, 2008). The two banks under study have certain risk management mechanism, but it is a basic mechanism of one stage, or a mechanism targeting at individual peculiar risk as credit risk. Therefore, from the macro angel, E.Sun Bank still have the problem of missing risk management mechanism, which is indicated by incomplete risk management system, improper system implementation and imperfect monitoring mechanism among others (Michael et al, 2005). The missing of this system will cause the lack of basic structure in effective operation of enterprise-wide risk management, and stand in the way of risk management system formation.

 

The managers emphasised the enterprise-wide risk management. Being different from traditional risk management that focused on credit risk, modern bank risk management also pays attention to other risks, such as market risk, liquidity risk, operational risk and legal risk (Robert, 2009). It not only treats possible capital loss as a risk, but also deems bank reputation and personnel loss as risk, for which the concept of reputation risk and personnel risk are put forward.

 

In the aspect of risk management culture, the respondents’ banks already have certain risk management culture consciousness, and realise that they need to create a significant risk management culture, to promote the risk management work of whole banks. However, at present, the banks still have not formed advanced risk management culture (Donald, 2008). Risk management departments and business departments seldom eliminate the culture differences by communication, and the conflicts between foreground and background are always solved passively instead of being solved by communication.

 

  1. SinoPac Bank

For SinoPac Bank, it has been suggested earlier that reserve holdings are negligible. This means that they exploit income producing avenues to the maximum at least in the short run. Presumably, the deficit costs of inadequate reserves must not be high during normal times given easy access to the interbank market and parent institutions, while the opportunity costs of incomes foregone is rather high. The need for an adequate capital is of crucial importance over the longer term (Lerche, 2006). To protect against this risk it, the banks would be operating with high capital to asset ratios. In recent years, however, observers of the Taiwan currency market have been alarmed at the decline in these ratios for most banks. This decline indicates a greater willingness by banks to take the risk and an acceptance of reduced protection against it (Michael et al, 2005). The problem is further compounded if we were to account for the erosion of capital resulting from inflation since most of the bank’s equity consists of monetary assets. This erosion of the real value of the SinoPac Banks capital puts on added pressure to be fully loaned out so as to generate increased earnings to cover for inflation (Graham, 2008). The observation that SinoPac Banks  has resorted to operating with lower capital to asset ratios can be theoretically justified, if, even for the longer term horizon, the expected opportunity cost of holding inventories of capital exceeds the deficits cost of portfolio adjustments to a general collapse (Lerche, 2006).

 

  • Loan risks in the two banks and their management in relation to decision making

 

This risk arises for the bank from the possibility that due to circumstances special to the borrower, there will be a delay in loan repayment or default on the loan. This risk is faced by any commercial bank and is not peculiar to the Taiwan currency operation. This risk takes on an added dimension for an E.Sun Bank because loans are generally of large denominations, and unsecured.  The lack of collateral for loans granted is attributable to the intensity of competition among banks and the high standing of borrowers.  In recent years, the usage of formal collateral and guarantees has increased as banks have sought some security on loans granted to oil deficit countries (Donald, 2008).  During normal circumstances when banks use floating rate loans, match deposits to loans in terms of currency and maturity of the roll-over period, the only risk that they still face is the credit risk (Lepetit and Tarazi, 2008).  This risk is, therefore, most significant, and least in the banks power to control.

 

The impact of loan losses can be felt on the level of cash reserves held by E.Sun Bank and its capital account. Changes in cash reserves are a consequence of granting and repayment of loans. When loans are granted cash reserves decline while repayment increases these reserves. Default (or delay) by a borrower on a loan due means that an expected repayment or inflow of cash did not materialise. A bank’s cash reserves are subject to this uncertainty. Losses in the capital account are likely over the longer term, most obviously, because of insolvency of the debtor. A bank has information on the ability of respective debtors to repay their obligations in a probabilistic sense only (Robert, 2009). These losses can also stem from short-term losses on cash reserves (due to insolvency or delay by debtors to repay obligations) which force bank portfolio rearrangement such as borrowing of deficits at unfavourable rates, incurring of losses in selling of assets and transaction cost (Michael et al, 2005).

 

According to Robert (2009), it has already been alleged that Taiwan banks operate in perfectly competitive markets.  This means that an individual bank is a price taker and adjusts the volume of its activity in accordance with the interest rate which is beyond its power of control.  This free market determined interest rate is known to fluctuate a vast deal in Taiwan’s Banking Industry.  Since Taiwan banks, liabilities with definite maturity dates during the “normal times”, when confidence in the market remains supreme, banks do not run the risk of unexpected withdrawals (Michael et al, 2005).  They face interest rate uncertainty rather than uncertainty in the maturity of deposits.  Interest rates on assets and liabilities fluctuate freely from day to day, and there is no credit rationing in Taiwan.  Furthermore, it has been observed that long-term interest rates do not diverge a vast deal from short-term rates which mean that Taiwan banks have an expectation of remarkably little deviation of the term structure of interest rates from parity (Donald, 2008). Since most banks are risk averters, a high degree of uncertainty about future interest rates, and term structure of interest rates close to parity, will result in balance sheets being closely matched (Lepetit and Tarazi, 2008).  There will be remarkably little asset transformation and the distribution function of financial intermediation will dominate.

 

  • Exchange Rate Risk and how the banks deal with it

With an inalterably fixed exchange rate, there would be no exchange rate uncertainty and maintenance of open positions in a currency or exchange rate speculation would be relatively safe. With a floating exchange rate system, exchange rate uncertainty has been contented with (Donald, 2008). To limit exposure to expected exchange rate volatility, a bank’s response is likely to be in terms of greater attention to the currency composition of its assets and liabilities. To avoid interest rate risk there is matching of the maturity of the deposit to that of the loan and to avoid exchange rate risk on transactions there is a matching of the currency denomination of the two. If SinoPac Banks balances assets and liabilities by currency class, there would be no net exposure to foreign exchange risk (Robert, 2009). Currency transformation or the buying of “loans in one currency as a result of having sold deposits in some other currencies” would be effected “whenever the difference in interest rates on deposits or on loans differs by more than the transaction costs and risks” (Lerche, 2006). Although pure exchange risk can be hedged away through purchase of forward cover, a residual exchanged risk, associated with premature repatriation, remains (Lerche, 2006). By purchasing a forward contract in dollars, the bank fixes the dollar value of the asset at the time of maturity. If the bank is forced, because of need or external circumstances, to repatriate funds prior to maturity, a net loss or gain is likely depending upon the then prevailing exchange and interest rates.

 

Spillover Risk and Decision making in both SinoPac Banks and E.Sun Bank

Important changes in Risk Management Practices at the managerial level have occurred after devastating effects of the global financial crisis (Graham, 2008).  Using the two banks’ past records and journals, it appears that the bank managers risk management strategies evolved from the maintenance stage, to a growth stage; where the focus is on offering more diversified risk management strategies (Lepetit and Tarazi, 2008).  In a few instances, banks moved to a mature stage where the focus is on ensuring that recently added techniques and strategies are making a significant contribution to the banks overall success.

 

All the bank managers believe that it is necessary to form a correct risk management               concept, by learning risk management concept of world. These bank managers consider risk management as an important part of their job (Donald, 2008). However, they have some misleading ideas of risk management in the past which make it take a long time’s effort to lay advanced and correct risk management concept in the minds of bank staff. Despite that many bank managers have realised the importance of bank risk management theoretically in mind, many banks in practice and operation still pass on the ideas that: operation scale is too much emphasised so risk management is put on the opposite side of business development mistakenly, with the thought that risk management is to make   business staff in trouble, and without considering risk control same material with profit creation (Robert, 2009).

 

While some risk, managers simply think that risk control means less business and avoids risk bearing by denying business, which cause the failure of many available business and the decrease of anti-risk ability of banks (Claessens, 2004). In recent years, banks of the country are trying to set up correct risk management concepts. These efforts will predictably last till the scientific risk management concept is rooted in every staff’s mind of banks.

 

In the aspect of credit risk management mechanism, the bank managers is unanimous in realising that credit bank risk management is a systematic strategy, which needs the coordination of many factors, in order to reach the goal of lowering the bank risk. The banks of in the study have a certain risk management mechanism, but it is a basic mechanism of one stage, or a mechanism targeting at individual particular risk as credit risk (Michael et al, 2005). Therefore, from the macro angel, the banks still have the problem of missing risk management mechanism, which is indicated by incomplete risk management system, improper system implementation and imperfect monitoring mechanism and the likes (Claessens, 2004). The missing of this system will cause the lack of basic structure in effective operation of enterprise-wide risk management, and stand in the way of risk management system formation.

 

The managers emphasised the enterprise-wide risk management.  Being different from traditional risk management that focused on credit risk, modern bank risk management also pays attention to other risks, such as market risk, liquidity risk, operational risk and legal risk. It not only treats possible capital loss as a risk, but also deems bank reputation and personnel loss as risk, for which the concept of reputation risk and personnel risk are put forward (Robert, 2009). Besides, with the trend of more and more internationalised operation, commercial banks pay more attention to the integrative measurement and management of the risk bearing in global range, to prevent all possible adverse events from happening anywhere in the world (Claessens, 2004).

 

At present, the banks still haven’t formed advanced risk management culture (Donald, 2008). Risk management departments and business departments seldom eliminate the culture differences by communication, and the conflicts between foreground and background are always solved passively instead of being solved by communication (Graham, 2008).

 

Conclusion of Analysis

From the analysis, it is evident that the two banks and other Taiwan banks are using various strategies to manage their risk exposures and manage their risks. Risk management has various advantages in the management of the two banks and Taiwan Banking Industry (first objective). Risk appetite is high for bigger organisations compared to smaller organisations in Taiwan.

 

  1. Summary, Conclusions, & Recommendations

The following is the final section of the dissertation that summarises what has been found in this study, conclusions from the findings, and recommendations for future research.

 

There is a long development history of risk management among Taiwan banks taking a close reference to E.Sun and SinoPac Banks. As emphasised by Basri (2008), through decades of development and practices, they have developed many advanced concepts and methods. These banks pay more attention to the management of all risks in the global range, emphasising that risk management should be throughout the whole process of banking operation (Aliber, 2005). They also nurture positive risk management culture and apply mathematic models for quantitative analysis on risk to measure the bank’s risk bearing capacity as a whole (Basri, 2008). According to Bebch2008, inside the banks, risk management is becoming the self-consciousness and activity of all staff from profound theory.

 

Risk is faced by Taiwan banks, as with most business, because of their ability to anticipate the future correctly. This uncertainty about the future influences bank portfolio decisions today.  Bank behaviour is based on given and expected perceptions of some key variables (Dent, 2009).  Specifically, we need to take into account the main forms of risk to which Taiwan banks are exposed because of changes in interest rates, exchange rates and behaviour of borrowers and lenders (John, 2004).  The risks emanating from these variables can be classified as being interest rate, exchange rate and credit risks.

Conclusion

It is concluded that, along with the expansion and enriching of economic development, advanced bank risk management has been developed from single risk management development into the enterprise-wide risk management of all kinds of risks. The risk management technology is developing from quantitative method into more precise and advance quantitative direction (Berger, 2007). The risk management content is richer and richer, and its technology is more and more complicated. E.Sun Bank will introduce advanced risk management concept and technology step by step, to establish enterprise-wide risk management system.

 

Implications

For bank managers, the results of the study may improve their performance by identifying “best practices” and “worst practices” associated with risk management. Best practice risk management techniques/strategies were discussed by these bank managers. The research results also provide information about the effects of using these risk management techniques on bank efficiency.  Knowledge of this information will further assist bank managers in their future risk management.

 

Limitations of the research

The study was limited to secondary information collected from the data sources. The data findings were limited to the secondary data collected from articles and online databases. It is believed that the findings would be different if the sample demographics were different.

 

Risk Management Policies

The first and substantial attempt to investigate the role of risk management policies in banking crises was made by John 2004. John 2004 focuses more on the choice between an accommodating and strict risk management policy. Both studies of E.Sun and SinoPac Banks show that certain risk management policies, namely unlimited deposit guarantees, open-ended liquidity support, repeated recapitalization, debtor bail-outs, and regulatory forbearance tend to increase fiscal costs. Furthermore, in order to prevent loss of confidence that could trigger a bank run and a more harmful crisis, an explicit guarantee to depositors and creditors should be enforced. Forbearance, repeated recapitalization, asset management companies, and public debt relief are examples of resolution policies that are often adopted in this phase. Forbearance and repeated recapitalization policies allow banks that are technically insolvent to continue its operation with the intention of avoiding widespread suspensions and bank closures and restoring solvency (Lepetit and Tarazi, 2008). Asset management companies and public debt relief program are established with the purpose of allowing banks to focus on their core business activity by letting governments or other agency manage their nonperforming loans.

 

There is the risk that capital controls (such as exchange controls) might be imposed in the centre where a bank’s assets are held. Exchange regulations will interfere with movements of funds out of a financial centre (Robert, 2009). Movement of funds between the Taiwan markets is not likely to be disturbed. This risk can be counteracted by granting loans to a potentially feared country in that country’s currency. Another practice that has become widespread in light of currency instabilities is the denominating of loans in several currencies (Hinton, 2004). Taiwan banks also protect themselves against the inadequacy of a particular currency on a loan rollover date. If exchange restrictions are such that are desired currency ceases to be available in sufficient quantity to affect a roll-over, the amount drawn under the loan agreement is due immediately. This should limit the liability of a bank in the event that some currency crisis in the market made roll-over on outstanding loans difficult (Graham, 2008). On the other hand, in the event that during a crisis a majority of the borrowers are unable to repay loans draw down, the credit risk remains.

 

In Taiwan and other markets, since the market is international in nature, the cost of such information gathering on borrower credit worthiness and their usage of funds can be extremely high. A bank, customarily, does not know how much a borrower has obtained from other sources and questions of country risk compound the difficulties of obtaining useful information. E.Sun and SinoPac Banks have tried to keep informed of tendencies in the overall market by active involvement the interbank market. Here, a typical bank acts both as a lender and borrower of interbank funds at the same time (John, 2004). By churning out deposits of a cosmetic kind, this market provides traders “with information both about demand and supply, and it allows traders to stay in close touch with the market’s ‘feel’ for the ability and soundness of individual traders and banks. Trading deposits may in a sense be an efficient way of trading information about individual banks and their techniques” (Claessens, 2004). The costs of this information should be negligible, as indicated by the spread between bids and offer rates on interbank placements. During times of crisis, these costs are likely to increase because of general erosion of confidence. The observed “tiering” of banks in terms of size, credit worthiness, stockholder support and recourse to external assistance reflects the increased cost of seeking information needed to reduce the heightened credit risk during panic conditions of interbank placements. Baltensperger 2002 also suggests that banks cushion the possibility of credit by holding reserves of cash and capital. It is because of uncertainty that a bank holds inventories of reserves and capital accounts. Was it not for these reserves a bank would have to incur deficit costs of borrowing needed amounts at favourable rates, selling of assets at capital losses and transaction costs. The holding of inventories also entails an opportunity cost for the bank in terms of income foregone in not being fully loaned up (Claessens, 2004). If the expected opportunity costs exceed deficit costs, it pays to hold a smaller inventory of excess funds. The optimal inventory size would be one where the marginal deficit cost is equated to the marginal opportunity cost.

For E.Sun and SinoPac Banks, it has been suggested earlier that reserve holdings are negligible. This means that they exploit income-producing avenues to the maximum at least in the short run. Presumably, the deficit costs of inadequate reserves must not be high during normal times given easy access to the interbank market and parent institutions, while the opportunity costs of incomes foregone is rather high.

The need for an adequate capital is of crucial importance over the longer term. We are interested, because of credit risk considerations, in the protection a bank has against the risk of general collapse due to widespread debtor default (John, 2004). To protect against this risk it would be expected that banks would be operating with high capital to asset ratios. In recent years, however, observers of the Taiwan currency market have been alarmed at the decline in these ratios for most banks (Claessens, 2004). This decline indicates a greater willingness by banks to take the risk and an acceptance of reduced protection against it. The problem is further compounded if we were to account for the erosion of capital resulting from inflation since most of the E.Sun bank’s equity consists of monetary assets. This erosion of the real value of the bank capital puts on added pressure to be fully loaned out so as to generate increased earnings to cover for inflation.

The observation that Taiwan banks have resorted to operating with lower capital to asset ratios can be theoretically justified, if, even for the longer term horizon, the expected opportunity cost of holding inventories of capital exceeds the deficits cost of portfolio adjustments to a general collapse (John, 2004).

 

Recommendations

The bank managers which are the main contributors to this study with ideas and suggestions will receive a report of the findings from the study.  Since the data collection came from the bank managers’ risk management skills, the findings from the study should have an added relevance, not only to the participating banks but also to the other banks as well, operating, not just in Taiwan but also in other places.  Since the manager participants were offered a free report of the findings, a variety of requests from the participants have been received. Several of those requests were for more detailed and substantive information, which will also be fulfilled. Therefore, the knowledge gained from this study can flow on to those who find it applicable and advantageous.

Because of inherent difficulties of generalizing the findings of the study to all banks, further research is suggested in the following areas:

  1. Examine all the real options to understand the value of each one to the bank risk decision- maker and why.
  2. Using a case-study methodology, research those banks that have recently managed their bank risks and ascertain why. Further, real options could be discussed with participants from the perspective of preventing failure to manage risks. The case-study approach is suggested because locating sufficient number of banks to collect data using a survey instrument would be tenuous at best or impossible at worst (Lepetit and Tarazi, 2008).
  3. Identify the applicability of real options to the wide variety of banks not used in this study.

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How revolutionary was the American Revolution

How revolutionary was the American Revolution

A revolution can be said to occur when there is a drastic and radical change in a social, economical or political institution. The American Revolution took place from 1775 as a protest from the thirteen North American states to the British government. The war ended in 1783 after the American states worn. The war was as a result of the poor treatment that the British gave to their colonies. After the war with the French in which Britain succeeded, the colonial masters were left in a huge financial crisis. To ensure economic recovery, they imposed heavy taxes on the Americans. The Americans insisted that they would only pay the taxes if they received equal representation as Englishmen (Countryman, 64).

The declaration of independence was formalized on July 4 1776. It contained three major parts that the Americans used to declare their independence from the reign of the British. Apart from the claim of independence, it also listed the rights of man and validated the reasons for the revolution while accounting a list of complaints against the British King George three. After the reading of the declaration of independence on July 9 1776, that the 13 North American colonies used to declare their independence the American army was no longer under Britain’s rule. They destroyed the statue of King George three in New York City which was strategically placed at the foot of Broadway on the bowling green July 9 1776. This symbolized the end of a monarchy based government into a republic where the people would vote for their leaders.

The unanimous declaration of the thirteen United States of America congress contained revolutionary statements which spearheaded the road to democracy, equality and autonomy. The concept of all men being created equal was a radical statement that was used later on as a stepping stone to abolish slavery and bring respect between the rich and the poor. The declaration used the basic human rights of life, liberty and happiness as the unifying factors between all people. The issue of a government that would derive its just power from the people it governed was a new concept. The British government had instilled rules on the thirteen states that neglected the needs of Americans and focused on their colonial masters. The revolution brought a government that was just and would exist sorely for its citizens.

The drawing by Benjamin Henry Latrobe which was drawn on November 1797, during the period of the revolution depicted two men playing a game of billiards in Virginia. The two men come from distinctly different social classes and status quo. While one man is elegantly dressed symbolizing the elite of the society the other man does not even have shoes and symbolizes the destitute of the society. Though the two are playing a game together the gap between the two is too wide. The social gap between the elite and the poor of the society was too wide prior to the revolution and the rich would publicly dehumanize the poor regularly. The drawing of the two different sides of the society enjoying a game together symbolizes social change and equality which could not have happened before the revolution. The revolution brought about respect and recognition of the value of all men whether rich or poor.

The William and Mary quarterly was a journal that published the research findings of the day. It published the economic status of representatives drawn from several state legislatures post and prior to the revolution. A legislature is an assembly with power that allows autonomy in making and ratifying laws. From the documents it printed from data collected in 1765 and 1785 it depicted a decrease in the wealthy population and an increase in the middle classes after the revolution. Though the journal depicted a decrease in wealth in the six states it picked on two dates prior to the revolution and immediately after the war (Greene, 154).

The revolution like every other revolution brought radicalism and concepts like equality and rule of law were sought after. With these tenets it was no longer possible to tolerate slavery for both the black population as well as the Americans. Though these values were highly compromised a social and political reform was started that acted as a platform for all the changes that came later. The northern states which had experienced revolution and independence from the British, passed laws that abolished slavery much earlier than their southern counterparts who held on to slavery until the late 19th century. In the north the different states passed an ordinance that outlawed slavery in 1787 while in the south most of the states had to be forced by the emancipation proclamation in 1863, almost a century later to abolish it (Engerman, 450).

A young African American who was a valedictorian of New York free school gave a speech that highlighted the plight of the black men in the society in a public examination. Though slavery had been abolished, in its place racial discrimination had taken root. The young man wondered on the logic of striving to acquire the essence of man if the elite of his society would never recognize him as a man. He complained about the plight of black men being qualified and yet unemployable in good jobs simply because they were black and the white men would not work with them. The American Revolution abolished slavery for the African Americans but their equality and recognition as human beings did not come with the revolution and instead of slavery they were relegated to servant chores, seamen and other menial tasks.

Though the revolution brought with it a new level of consciousness for the women it took more than a century for their voice to be heard. Many women had been involved in the boycott of the British trade during the revolution as the men went to war and they were left with the responsibility of running households and supplying weapons. After the revolution the American women demanded respect from their male counterparts both at home and in the social circles. Lucy Knox, Judith Murray and other women passionately demanded equal rights for women. Abigail Adams who was the wife of the second president of the United States, John Adams, wrote a series of letters to her husband championing for the equality of women in the American government. Of particular interest to her was a government in which women would have representation and would have a voice as an integral part of the governed. In 1920,144 years later the United States constitution passed an amendment which allowed women to vote (Nagel, 60).

George Washington wrote an ordinance that aimed at maintaining peace between the American people and the Indians unless in just wars which the congress would pass as lawful (Glatthaar 49). The Seneca Indians, who had fought on the side of the British, were pushed out of the land they had previously occupied as America sought to increase territory and security for its people. The American Revolution brought about a change in the territory the Indians had occupied as they abandoned the vast pieces of land they had acquired and were restricted into reserves (Proctor 79).

The American Revolution brought about a lot of changes for the American people and acted as a platform on which other revolutions were based on to ensure equality for all. The revolution however was particularly centered on championing for the rights of the average white American man. Women, African Americans and Indians still continued being sidelined until a revolution of each of these groups took place (Rodriquez, 300).

References

Edward Countryman. The American Revolution. Illinois: Hill and Wang. 2003.

Nagel, Paul C. The Adams Women: Abigail and Louisa Adams, Their Sisters and Daughters.

New York: Oxford University Press. 1999.

Samuel Proctor. Eighteenth-century Florida: The Impact of the American Revolution. Florida: University Presses of Florida.1978.

Elizabeth Fries Ellet. The Women of the American Revolution. Harvard: Harvard

University.2006.

Jack P. Greene, Jack Richon Pole. A Companion to the American Revolution. New York:

Blackwell Publishers. 2000.

Joseph T. Glatthaar, James Kirby Martin. Forgotten Allies: The Oneida Indians and the

American Revolution. Farrar: Straus and Giroux, 2007.

Stanley L. Engerman, Seymour Drescher, Robert L. Paquette. Slavery. Oxford: Oxford

University Press.2001.

Junius P. Rodriguez. The Historical Encyclopedia of World Slavery. ABC-CLIO, Incorporated.

1997.

How Religions/Belief of Afterlife Affect People

How Religions/Belief of Afterlife Affect People

The religious belief of after life is common belief in all religion worldwide. Christian in their holy doctrines that is the bible are convinced that after life on earth there is heaven and hell. Depending on how people live on earth determines whether people end to heaven or hell. The Hindus, Muslims and other world religion have their divergent view on life after death. These religious beliefs have ranged effects on people’s daily lives.

Recalling the incident on March 1, 2014, several Muslim terrorists from Xinjiang Province attacked the Kunming railway station, causing at least twenty-eight civilian deaths and more than a hundred injuries. The religious belief of after is life is common belief in each religion of the world despite of the political messages. For Muslims religious believers; their worldview of death is different when comparing with non-religious believers? To address this question more specifically, the question turns to focus on how religions would help people develop a worldview of death. This research will discover the ways that religions belief of afterlife affects people, such as funerary ceremonies, or beliefs, which lead a way for people to consider death. In order to have a deeper research on this inquiry question, I conducted an interview with Professor Ibrahim to discuss related issues in Islam. Professor Ibrahim, who is from the Department of Religious Studies, has research interests mainly focusing on Islam in the modern world. One of his research projects is how people would become socialized into Muslims with divergent interpretations of their religion, which can be related to some points of the question. In addition, combining with my brief observance on a Tibetan Buddhist funeral ceremony, the answer will be conducted by the experiential basis as well. These specific examples of two different religions will be used as examples to help explain exactly how religions affect people on the issue of death.

According to Professor Ibrahim, Muslims believe that the present life is a trial preparing for the next realm of existence by reading Quran. After they die, their lives end and there will not be another chance of life, unlike the Buddhism. The burial, Muslims consider, is the last service they can do for the deaths and a reminder for them to remember that their own lives here on earth will be completed one day as well. The Islamic funeral, described by Professor Ibrahim, follows the instruction of Sharia (Islamic religious law). The Islamic funeral contains a simple ritual, including bathing the body and have the body wrapped in a simple white cloth, following by the process of prayer. After these steps, the body with white clothes will be buried in a grave under the ground. The white cloth represents that the shrouding should be modest and simple and the prayer is provided for the forgiveness of the dead. Since every Muslim will be treated in the same way after they die, they strongly believe the uniqueness of the individual, similar with Christian and Buddhist. Muslims believe that everyone takes his/her own responsibility to live a good life, so they can head to the heaven after death. However, everyone has his/her own consideration about the definition of a good thing. A Muslim believes keeping doing good things can create an opportunity to achieve a better result of life so he will keep doing all his life. The terrorists were taught to carry a racial burden to save their religions in a political context. As Ehrenreich says, “more traditionally minded… may see little point to survival if the survivors carry no cultural freight – religion, for example, ethnic tradition” (par. 12), she explained herself with none religious or ethnic identity so she owned tolerance (Ehrenreich par. 14). Conversely, on some aspects, these terrorists carried too much “religious baggage” so they used violence to reach their common goal of integrity. Through this example, the worldview of death here can be affected by religious beliefs or religious ceremonies directly. However, these religious beliefs of death can be different to every single person. People would have their own understandings about the contents on the Quran, as well as the Christians toward the Bible. As a result, it can be concluded that religions can offer a basic direction for believers to view death through the funerary practices. Besides, at the following, my personal experience provides another way for religions help develop a worldview of death – through actual funeral ceremonies of Tibetan Buddhism.

Last summer, I travelled to Tibet with my friends. Tibet is a place where most of the local people believe in Tibetan Buddhism. Unlike Islam, which says the end of one’s life at the end of everything, Buddhist believes in the existence of Karma, which is associated with the idea of rebirth. It is believed that all life forms go through a cycle of a series births and rebirths. Tibetan Buddhists believe that after death, the soul of the person will still be in the process of rebirth, or the Karma to live as another life but with a different body. The dead body is like useless clothes and should be abandoned. Thus, there is a local funerary practice in Tibetan Buddhism called sky burial. The burial masters separate the corpse into pieces for the birds. During the process, no one sobbed or cried, even including the children. A local old woman told me that they did not know much philosophy about Buddhism, but they knew what they should behave and what death meant since most of the locals had watched or heard about the sky burial. Kafka described what the ape needs in order to transform as a human – both the internal and external identity as a human (par. 9). It can be applied here in explaining what the locals can receive from this event. They receive reminders about life and death by watching. The ways to accept death would change from their future behaviors toward lives externally and their own minds about death internally. Lu also mentioned the same idea of maintaining the balance of external and internal identity (447). The sky burial would remind them of the basic beliefs of life in Buddhism. That is, life has left the body completely and the body only contains simple flesh (Lu, Min-Zhan 34).

To sum up, religions help people develop the worldview of death by simply providing basic beliefs and religious ceremonies – the funerary practices. In an Islamic funeral, the dead body will be washed and wrapped in a white cloth and buried into the grave underground; while in Tibetan Buddhist tradition, the dead body will be divided into pieces to have the sky burial proceeded directly, without any other process. By the comparison of two religious funerary practices, it can be concluded that people will receive how their religions view the death of the ways that the religions react to the deaths. “Religion works as a provider of organized beliefs about natural and supernatural aspects of reality”, said Professor Ibrahim, “which is a fundamental theoretical basis for its believers”. In the category of death, religions do influence the believers through actual forms of religious ceremonies, including forms of funerals based on different religions.

This religious beliefs impact on people social, economic and political life. For hesitance research has shown the religious belief of after life strengthens religious values. People tend to follow their religious teaching in order to make their after life better. For example the Christians have various moral teachings that are contained in the bible in the form of the Ten Commandments. This law guides every aspect of day to day Christian living. For example, this law prohibits Christians from committing murder and adultery. Christians will endeavor to follow these moral teachings to better their after life better (Ehrenreich, Barbara 23)

Research has shown that death anxiety is the major determiner of religious behaviors. Correlation of the individual items death scales were highest for those that dealt with after life concerns. Take has a whole, however the six items made up an inadequate that mixed several belief items with practice items. Unidimensional scale that dealt with depth of respondents and equally well with different faith traditions. Even the non religious people are guided by their traditions in their undertakings. This shows the extent which the after life affects human being’s life.

Religion is part of human civilization and has impacted on peoples  on peoples political, social and economic behavior. The Islamic countries of the middle east have adopted the religious law in the Quran commonly known as sharia laws as forms of political governance. The religious leaders are highly regarded in the society and form the ruling class. Political environment affects various aspects of peoples life. This is because the political ruling will regulate and limit how people interact

The biggest impact on the religious belief is being on the social spheres. This religious belief is because it will form the basis of the moral values that people will adopt. Research has vilified this argument that death anxiety is real in all human beings. The people tend to use this base to form religious beliefs to give an answer to after life. The after life felling will definitely influence peoples’ behavior in the social spheres. This has been proven so as a great percentage of the world population are religious peoples. The major religions include Christianity, Muslim, Hinduism, buddithism and Judaism. All this religion has different moral teachings that are connected to the after life. All these divergent religious belief affect peoples live in different ways.  The extremist religious people have even sacrificed their own life in order to fulfill religious obligation. Cases of suicide  bombing and religious martyrs have been on the rise in the recent years. For examples extremist or radical people die sacrifice their own dear lives because of after live promises contained in holy books. This show the extent to which religion affect peoples lives.

Works Cited

Ehrenreich, Barbara. “Cultural Baggage. New York Times 5 Apr. 1992: 1-2. Web. 28 Mar. 2014.

Ibrahim, Nur. Personal interview. 26 Mar. 2014.

Kafka, Franz. “A Report for an Academy.” Kafka Project 8 Jan. 2011: Web. 28 Mar. 2014.

Lu, Min-Zhan. “From Silence to Words: Writing as Struggle.” College English 49.4 (1987): 437-448. Print.

How robotics helps decrease and increase the economy

 

Introduction

The changes in technology have had a lot of impacts on economics and daily operations in the current world. The advancement in technology has both positive and negative repercussions that need to be clearly understood before implementing any technology (Mas, 2005). Numerous machines and equipments have been made as a result of technology advancement. Various disciplines like robotics have emerged due to technology change. Robotics is the technology and engineering science of robots, their manufacture, design, application, and structural disposition (Alli, 2005). Robotics is associated with mechanics, electronics and software. With technology change and robotics, signs of robotic world all surround us. Robotics has led to development and increment in the number of robots in both developed and non-developed countries. Technology has to take its own course. However, we should also be keen to explore the consequences that the robots have and will bring to our lives and economy suppose robotics is emphasized. Many robots with various functions have been made since their innovation. In other words, other human beings have been created. Major automakers like Toyota and Honda are presently emphasizing on the humanoid robots development (Hoft, 1996). Toyota has had long history of robot development since 1970s. They (Toyota) have further recommended introducing robots to the Companies to provide cheap labor. With increase in technology, it is likely that many more robots will be made in the future. Robots introduction has a lot of impact on the economic performance in countries which are using them (Mas, 2005). Living standards and economies are affected directly due to changes that occur in workforce in the affected countries/states where robots provide manpower. One is left wondering about not only their future (robots) but ours and the effects of robots on the dynamic economy. With the threats of robots in the economy and society, the paper discusses the effects that robotics has brought and will to the economy especially the introduction of robots in the workforce. Very special attention has been given to America.

How robotics helps increase economy

Intelligent robots development is disruptive, socially and economically. Robotics has led to making of many robots that have displaced many employees from their jobs. With this rate, many people are to be affected in future. As long as the employees will lose their jobs, the production cost will also drop (Dawes, 1999). Humans are expensive however. The high production cost has been as a result of expensive labor charged by the human workers. The introduction of robots has decreased the cost of production as they provide cheap labor. Companies are looking for all means to reduce the workforce so as to decrease production cost. They have overlooked their workforce and preferred robots (especially in America). They consider robots better, faster, dedicated, not supervised, and conveniently to work with (Dawes, 1999). For example, when referring to supply and demand, one cannot sell something for less than its cost of manufacture. Robots can make other robots, and the chain can continue in an exponential succession, and soon the supply exceeds demand. When such happens, the robot price will drop and also the labor cost (Mas, 2005). With humans, the production entails raw material cost, labor cost, facility and machinery usage cost, and intellectual property cost. When robots are used, the cost of labor drops to zero, and cost for robot usage is transferred into facilities and machinery usage costs. When robots are used, the production cost is the cost of producing other products. What is the implication? The more manufacturing capability, the lower the production cost. When robots can make other similar robots to perform similar functions, capability of manufacturing will exponentially explode and so the production will increase leading to prices drop (Hoft, 1996). When finally robots will be used in manufacturing industries, human labor will be of no more use. The labor from humans will not be required. The cost of all products manufactured by robots will drop as a consequence of lower production cost. The living cost will drop to almost nothing when robots will be introduced in numerous Companies. Cheaper products will be sold. Economy will be better.

How robotics helps decrease the economy

The future however looks very weird for most of us! Dawes 1999 when peering into the weird future with the robots says people should always prepare financially for the strange time to come. He closely looks at American economy and states that Americans should pay off their houses or sell them or rent them prior to the coming time. They should always try to live below their means to save the little they have or work for presently. The notion might appear alien to American citizen and people who think they should always live the limit of their means. He also notes that during the time (robotic), most people will be living on savings as very few will be in the offices (Hoft, 1996). The only thing that will be worth will be land, and developed or raw will of similar value. The location of the land according to him will be of nothing. Robots will make life enjoyable every where deserts included. They will perform our manual duties, operate and direct interactions amid institutions and people, do domestic work, fight wars, and so may be our slaves. Notably, the number of law-breakers will reduce as a consequence of robotic and surveillance policing. It looks luxuries life but once the savings will be over, money will only circulate among few individuals. It might be the hardest time ever seen in the history of most countries America included. Only technicians will be employed (Mas, 2005).

Although U.S business innovators and technology have recognized that robots in Companies have potential to create more employment opportunities but the laymen consider robots liability. Factories where robots are used need many people to build, design, and program the robots as they state. They base themselves on the facts that the robots help remove people from what they shouldn’t be doing. However according to Alli 2005 the introduction of robots will increase unemployment. The managers at numerous firms do hire robots instead of humans. People are slowly loosing their jobs decreasing economic growth (Alli, 2005). Dawes 1999 says that suppose you are a worker in United States presently, you must be worried about the future. There are numerous destructions that have been caused by the robots introduction in the manufacturing industries as far as workforce is concerned. Unemployment for example has increased by 14% in Michigan since the introduction of robots. The robots are able to work full time with increased accuracy, reliability, and are able to perform better than human beings. The economy is thus decreased due to high number of unemployed people (Dawes, 1999).

Reference

Alli, G. (2005). Cultures and Organizations: Software of the Mind: Intercultural Cooperation and its Importance for Survival. UK: McGraw-Hill International.

Dawes, R. (1999), World in 2015: Technology and Engeneering of robots. New York: Free Press.

Hoft, N. (1996). International Technical Communication: How to Export Information about High Technology. New York: John Willey and Sons.

Mas, I. (2005). Industralized world. Robots and the Society. Washington, D.C.: Publisher.

 

 

 

 

Project Risk Management

and

Risk Appetite

 

By

 

Yin-Chia Hung

 

 

 

Dissertation submitted in partial fulfilment for the of Degree of Master  of Science in Msc

 

Yin-Chia Hung   WMG

University of Warwick

 

 

Submitted month, year

 

For completion by Moderators:

QA procedures complete; passed to Exam Board

 

Signed:                                                                              Date: 

Declaration

I have read and understood the rules on cheating, plagiarism and appropriate referencing as outlined in my handbook and I declare that the work contained in this assignment is my own, unless otherwise acknowledged.

No substantial part of the work submitted here has also been submitted by me in other assessments for this or previous degree courses, and I acknowledge that if this has been done an appropriate reduction in the mark I might otherwise have received will be made.

 

Signed candidate   YIN-CHIA HUNG

 

You are required to justify your submitted thesis against the degree definition for which you are registered.  This needs to be downloaded and pasted into the box below.

 

Project definition for my degree

 

A suitable project should relate to, or be applicable to, the management of projects or programmes. Topics can include methods, methodologies, tools, processes, human factors, multi-project scenarios, collaborative projects, in-company applications, or new product or service introduction. The application or research can be in any industry, including but not restricted to, engineering, service industry or IT

 

 

My project relates to this definition in the following way:

 

 

 

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NAME:                        YIN- CHIA HUNG

 

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Signed: YIN- CHIA HUNG                                                     Date: ………………..

 

Abstract

The recent financial crisis has evoked interest in regulation of bank risks in general and of market risks in particular. Heavy losses on trading portfolios incurred by some of the largest banks in Taiwan and across the globe have elicited deficiencies in their internal models and processes for managing market risks. Currently, in Taiwan and other nations, banks are searching for new ways of expanding their underwriting capacities and managing their risk exposures.

Project risk management is the art of and science of recognising, analysing and responding to risk all through a project’s life cycle and in the best interest of meeting project objectives. A frequently overlooked aspect of project management, risk management can often result in a significant contribution to the success of projects. Risk management can have a positive effect on selecting projects, identifying the projects’ scope, and making practical schedules and costs estimates. It helps project stakeholders appreciate the form of the project, engages team members in defining strengths and weaknesses. Project risk management also helps to integrate the other project management knowledge areas. When risk management is effective, it results in fewer problems, and for the few problems that exist, it results in more expeditious resolutions.

Other features associated with the risk appetite include the thought that an appetite will normally relate to a range of possible outcomes. Therefore, around the risk appetite there is normally a given zone of risk exposure or level for the risk that is within appetite. This may be referred to as risk tolerance range for exposure to that risk. The aim of developing risk management strategy is to establish a framework on the basis of which effective risk management procedures can be set. The other aim is to determine how risk management can be embedded in regular project management activities.

While assessing the impacts of Project Risk Management and Risk Appetite in E.Sun and SinoPac Banks, two research questions were formed to act as a guide. The first objective was to carry out a critical assessment of the benefits of a formal risk management in the Banking Industry taking E.Sun and SinoPac Banks as case studies. The second objective was to determine the impact of risk appetite on business conduct under the current economic circumstances taking the two banks as case studies. The research objective was to understand how risk appetite and tolerance influence decision making in Banking Industry. This was achieved by contrasting and comparing regular delivery projects with financial investment projects. Referring to the nature of research topic and the ease in getting information, the researcher considered it crucial to approach the research from a qualitative research paradigm. In that case, the research was conducted in an inductive approach using E.Sun and SinoPac Bank as case studies and data was collected from various sources. Data was collected mainly from secondary sources.

Nonetheless, the research outcomes make it possible to deduce effective project risk management strategies that have assisted E.Sun Ba

Table of Contents

  1. Chapter One: Introduction
  2. Chapter Two: Literature Review

2.1 Project Risk

2.1.1 Risk Appetite

2.1.2 Project Risk Management

2.2 Importance of Risk Management

2.3 Project Risk Management Process:

2.3.1 Risk identification

2.3.2 Risk assessment

2.3.3 Risk quantification

2.3.4 Risk response planning

2.3.5 Risk monitoring and control

2.4 Why it is necessary for risk management iteration in the project life cycle

2.5 Enterprise Risk Management

2.5.1 Office of Government Commerce

  1. Chapter Three: Research Methodology

3.1 Research Philosophy

3.2 Research Approach

3.3 Data Collection

3.4 Qualitative vs. Quantitative

3.5 Research Strategy

3.6 Research Method

3.7 Validity and Reliability of Results

3.8 Research Plan

3.8.1 Research Plan and Time Frame

  1. Case Studies Analysis E.Sun Bank &SinoPac Bank (approx. 3200 Words)

4.1 Research Question 1: What are the benefits of a formal risk management in the Banking Industry?

4.1.1 Results& Findings

4.2 Research Question2: What is the impact of risk appetite on business conduct under the current economic circumstances?

4.2.1 Results& Findings

  1. Summary, Conclusion& Recommendations

 

  1. Chapter One Introduction

Due to complexities intrinsic in the global business environment and the competitive environment in the Banking industry, most financial organisations and banks are exposed to various risks.  Some of the risks are controllable by Banks, and there are others which are behold the control of the financial institutions. These risks and uncertainty are believed to have a significant effect on the operations of the financial institutions. Claessens 2004 asserts that the efficiency of a bank’s project risk management is directly proportional to the maturity of its risk management practices. He further emphasises the extent to which the risks have been efficiently integrated into the projects it implements (Claessens, 2004). In Claessens (2004) definition, integration means whether risk management activities are well defined and described in the project life cycle. It additionally refers to whether the activities happen regularly, as an element of project management processes.

Dent (2009) defines Project risk management as a process that ought to commence from project inception, and go on until the project is finished and its anticipated benefits realised. Basri (2008) and Dent (2009) further states that project risk management provides a holistic view of project risks identifies potential problems. Project risk management also builds processes to assist the service provider monitor and manage the risks.

Risk appetite is the level of risk that a company chooses to take based on the company-specific capability and assets available to absorb the risk (Basri, 2008 and Dent, 2009). Graham (2008) states that companies are well advised to consider what risks are acceptable to the company, and a suitable guidance to be followed throughout the organisation. There is no single correct way to fix the level of risk appetite or risk tolerance of a company (Graham, 2008). Grace and Robert (2003) state that smaller companies or organisations have less risk appetites compared to larger organisations or companies. This is because larger organisations are able to absorb the downside consequences of taking extra risks compared to smaller organisations (Claessens 2004). The level of risk appetite for a bank depends on how the bank operates the chosen strategy and the organisational culture; all interlinked (Graham, 2008).

As a subject of considerable concern, as emphasised by Yildirim and Philippatos (2007), risk management entails the identification process, evaluation and risks prioritisation and then successively followed by coordination and economical application of the existing resources so as to reduce, monitor and control the outcomes of the unfortunate events.

 

Research findings reveal that E.Sun and SinoPac Banks’ risk management strategies have been improving since the onset of the global financial crisis (Hoggarth et al., 2005). However, the possibility for a national bank crises and bank failure appear to be real over the short term. This situation as stated by Grace and Robert (2003) can be devastating not only to Taiwan but also to European economy in particular and global economy in general. This view is true despite the turn that the current financial crisis takes in some major economies like the US and therefore, the evaluation of the Taiwan banks’ risk management techniques is significant (Hoggarth et al., 2005).

In the short term, the Taiwan banking sector’s raising of the interest rates by the prime banks is received with mixed signal as a mitigation measure for the poor performance and creditworthiness (Lepetit and Tarazi, 2008). With the shock posed by the presence of other risks, the banking sector is prone to be forced out of its strong operational position as a result of the many structural adjustments that have been effected over the last few years (Baltensperger, 2002).

Claessens (2004) asserts that the Taiwan banking industry is concerned about risk management. All banks are searching for ways to control risk so that they can provide better services to their customers and decrease their risk exposures. Traditionally risk management has been the area where underwriters, lawyers and quantitative analysts have been employed (Lepetit and Tarazi, 2008). Their jobs were to put in place and implement policies that would protect investors, customers and business. As the banks look for new ways to increase their profits, they have to modify their risk policies. This dissertation seeks to identify the risks in the banking sector in Taiwan and establish risk management techniques that will ensure that possibilities of occurrence of such a crisis are minimised.

Research Aim and Objectives

The main aim of this research is to determine how risk appetite and tolerance influence the organisation when it comes up to decision making taking E.Sun and SinoPac Banks as case studies. The research further compares and contrasts risk appetite in regular delivery projects with financial investment projects. To achieve the research aims, the scenario in Taiwan’s banking sector was closely scrutinised to explore the risk management techniques used in E.Sun Bank.

The objectives of the paper are the following:

  1. To determine how risk appetite and tolerance influences the banking Industry when it comes to decision making taking E.Sun and SinoPac Banks both in Taiwan as case studies. The risk-preferences of managers were investigated to measure bank risk efficiency and its components.  Examining managerial risk-preferences lead to a determination of whether the bank is risk-neutral, risk-averse, or risk-loving.  The vital role of financial capital is highlighted as a tool employed by bank managers in managing and controlling their banks’ risk of failure.
  2. To contrast and compare risk appetite in regular delivery projects with financial investment projects. In addition, liquidity regulatory measures and supervision was examined closely, and its significance emphasised as it is the case with the capital regulation. This will then encourage more focused regular, supervision of both E.Sun and SinoPac Banks’ liquidity status and test of their risk management techniques. Establishment of a core funding ratio that will create assurance of sustained funding of the individual banks’ was considered.
  • The research further seeks to identify the benefits of formal risk management in the Banking Industry. In so doing, the research seeks to analyse the impact of risk appetite on business conduct under the current economic circumstances.

Significance of the Study

As stated by Blue and Jeremy (2009), the Banking industry is characterised as one that looks to maximise profitability and minimise financial risk. Banks are not in the business to lose money.  Banks are by nature exposed to a number of risks: credit risk, interest rate risk, liquidity risk, foreign exchange risk and general market risk. Risk management is a central issue for banks (Aliber, 2005).

  • The paper is meant to pave the way in providing alternative ways in which the E.Sun and SinoPac Banks and other Taiwan banks can take to tackle the challenges posed by the financial instability and risks.
  • This research assists in identifying the risk and management techniques will provide practical ways in which banks can take advantage of the powers availed.
  • The research further helps in identifying the use of the special powers to assist the banks out of the distressed status in a manner that mitigates the effect on the nations’ economy and the functioning of the entire financial system. In doing so, the dissertation will draw the banks’ attention to the prevalent risks identified in the research and challenge their management to implement the recommendations made so as to avoid their recurrence.
  • Recurrent studies in the area of risk management in E.Sun and SinoPac Banks offer a chance for intensive assessment of risks by banks inducing informed measures and initiatives for risk reduction and avoidance. In addition, the study will actively assist in strengthening the operation of the financial intermediary operators by having them understand the perceived risks and learn how to work with the banks in managing them. Further, the paper will be a means to remind the other financial institutions to maintain due diligence in their daily operations, particularly in the core payments, lending and in the basic systems that support their precise existence. This would initiate a sustainable system within Taiwan and other nation’s banking sectors that would in effect support the international financial system (Blue et al, 2009).

For bank managers, the results of achieving these objectives will improve their performance by identifying “best practices” and “worst practices” associated with high and low measures efficiency and risks.  Best practice risk management tools in attaining bank efficiency will be outlined (Santomero, 1995). The research is thus essential for both banks in Taiwan and other nations.

Organisation of the Research

This analysis begins with a statement of the aims and objectives.  A review of related literature is presented in chapter two.  The available literature in the Taiwan banking industry has dealt with the issue of rapid growth while the question of risk exposure and response to it has been looked on fleetingly.  Different types of risks faced by both E.Sun and SinoPac Banks are discussed. The section also discusses the initial conditions and the quality of banking institutions.  Conclusion summarised the literature review.

Chapter three details the methodology used in data collection. The research heavily relies on secondary materials.

The fourth chapter describes the result and discussion of the findings.

Chapter five presents a summary of data and the results, conclusions, and policy recommendations.

  1. Chapter Two: Literature Review

This section spells out the findings of the secondary research that was carried out for this study. The findings are drawn from different scholarly works and are presented as facts. It is significant to note that this section covers different general subtopics that pertain to project risk management. Also, it is essential to note that this section will look into project risk management from the context of the banking industry because the entire study is based on a case study of a bank.

2.1 Project risk

According to Cooper et al. (2005), the term risk is the chance of something happening that will have an impact upon objectives, which is measured in terms of consequences and likelihood.  Rescher (1983) stated that project risk exist in three different categories that include; unstated yet incorrect assumptions, unknown things and omissions and errors. Unstated yet incorrect assumptions is a risk category that is potentially devastating, for example developing a software on a platform of a single language and later in the project development it is noted that to achieve maximum performance it is important to include other languages into the software. In the risk category of errors and omissions, these occur because of incorrect specifications, estimation mistakes and overlooked features. These risks are at times considered mundane but they have a high propensity of negatively affecting the outcome of a project.

Hillson (2007) notes that in the basic description of project risk; there are two key elements, which are usually factored in; they include condition i.e. the situation, circumstance or a set up that causes uncertainty. The second element is consequence i.e. what is/are the possible outcome of the current condition.

Summarily, Heldman (2005) argues that project risk has numerous definitions based on the different context or practice area that it may be applied, while Risk management is part of everyday life and it is practiced in managing major construction projects, organisations or simply whilst a pedestrian is crossing the road. It is however, important to acknowledge that risk management practitioners, consultants and even scholarly work mainly specify or specialize on a certain set of practice areas of risk, which include; economic risk, human factors risk, financial risk, health risk, security risk, environmental risk, societal risk, business risk and information and communication technology risk.

Each of these risk practice areas is widely discussed and broad in their individual context. Since this present dissertation will include the banking industry as its case example, it is pertinent to discuss financial risk. Financial investments are also perceived as projects and Cokelyet al. (2012) notes that they are seen as projects because they involve works that are organised carefully and designed to achieve a particular aim which vary depending on the field of the financial investment. For example the banking business is a project that involves provision of various products and services that aim at protecting customers’ deposits, offering loans and other additional services such as safe custody. Secondly, investment banking business is a project that involves buying and selling shares and stocks with the main aim of generating a substantial return for the customer.

Specifically, Hopkin (2012) notes that in the financial market there exist three different types of risks that include; operational risk, credit risk or market risk.

Market risk has been described by Saunders (1999) as the possibility of an investor incurring loss in his or her trading operations at the financial market due to moves in market factors.  There are mainly four market risk factors that include; currency risk i.e. risk that foreign exchanges rates will fall. Equity risk is a risk in the fall of stock prices while commodity risk is the risk of a fall in prices of commodities such as gold or oil. Lastly interest rate risk which is the risk that interest rates will change and erode returns (Siems, 1996).

According to Tysiac (2012) credit risk also known as risk of default on the repayment of debt, is in the financial markets described as risk that affects trading operations when an investor fails to take up securities he or she had initially bought or takes up the delivery and fails to pay at settlement of a derivative contract.

Operational risks in the financial market are described by Scholes (1972) as the risks that originate from players in the market and the entire process at the financial market.  Mistakes by brokers and even fraudulent activities by them amount to operational risk, in addition factors such as technological, failures, poor management, errors in financial reporting, rogue trading i.e. brokers making personal gains from funds of investors and lack of control and accountability all amount to operational risk in the financial market.

2.1.1 Risk appetite

Kendrick (2003) in his studies described risk appetite as the willingness of a project manager or organisation to take on risk. A high risk appetite infers that the project manager or the business organisation is ready to take on more risk in pursuit of the set goals, and low risk appetite infers that the project manager or the business organisation is not ready to take on big risks.  It is critical to consider the concept of risk appetite before commencing risk management since it is vital in the effective setting and implementation of risk management measures.

The concept of risk appetite is analysed from different angles, for example when looking at the concept from a threats angle it considers the extent of exposure that is perceived as justifiable should the threat become a reality. From a threat angle, risk appetite compares the cost of risk prevention to the cost of exposure should the threat become a reality and finding a justifiable balance (Dirk, 2008).

While looking at the concept of risk appetite from an opportunities angle; risk appetite considers to what extent a project manager is willing to risk so as to attain the maximum potential/ benefit of the project. From this angle, risk appetite compares the actual value of the returns of the project to the losses which might have been accrued (Wideman, 1992).

In construction projects a constructor will be deemed to have high risk appetite if he/ she undertake a construction project along a coastline that is prone to various threats such as rise of water/ sea level, earthquakes or flooding. However, such a project offers high return since properties along the coastline are considered attractive and they fetch high market prices. In financial investment, investors with high risk appetite usually take up shares and equities that are highly risky but are usually deemed to be highly rewarding.  However, it is important to note that some risks are unavoidable and at times an organisation cannot effectively manage to reduce the risk to a tolerable level, an example of such a risk is terrorism (Dirk, 2008).

2.1.2 Project risk management

Referring to the studies conducted by Van et al (2004) project risk management has been defined as a process of identifying, assessing and prioritising risk, this is the process of identifying, assessing and prioritising risk, this is then subsequently followed by coordinating and economically applying resources in a bid to reduce, supervise and manage the probability or the effect of unforeseen occurrences.

In the financial management context, risk management has been defined by Tapiero (2004) as the understanding and communicating of the identified risk, so as to ensure that the identified risk is given the wide attention it deserves.

Project risk management adopts different strategies that mainly aim at reducing the impact of an identified risk or reducing the probability of a certain risk occurring; eliminating the identified risk; transferring the risk to another party within the project or, even some avoidable consequences of an identified risk.

In the banking context, credit risk is the most common, because of high number of cases of loan defaults by customers that lead to ‘bad debts’ being written off; this subsequently has the potential of making the entire bank collapse due to inability to honour customers’ right of payment on demand. This can lead to a spiral effect, which has the potential of crippling the entire banking system of a country. Usually the risk management strategy that is commonly applicable in the banking system is setting of a minimum capital requirement which will control and limit a bank’s lending and credit creation ability (James, 2003).

It is critical to note that the International Organisation for Standardisation (ISO) has set principles and guidelines that all risk management mechanisms should follow. These principles and mechanisms include; transparency; flexibility; inclusiveness; responsive to changes within; form the decision making process of an organisation; capacity to deliver continued enhancement and improvement within an organisation; periodically readjusted; factor in human issues; ability to create value for the organisation and also form an integral part of organisational processes (Keller et al., 2006). These principles and guidelines are reflected in all properly structured and developed risk management plans.

2.2 Importance of risk management

Referring to the studies conducted by Hillson and Murray-Webster (2007) risk appetite and tolerance are usually high among ambitious individuals and aggressive business organisations, these traits among this set of people is backed up by their “go-get” attitude. This is due to the common phenomenon that the higher the risk the more returns or rewards a venture is supposed to generate. This, therefore, means that individuals, as well as business organisations, will always be ready to undertake high levels of risk with the expectation of remarkable outcomes or handsome returns (Hallenbeck, 2006). However, in the likelihood of unforeseen circumstances the aforesaid individual or business organisation may suffer massive losses in the case that the venture is marred with unavoidable circumstances or events that hinder the realisation of the expected outcomes. It is due to this fact that James (2003) wrote that a wise investor will always factor in the risk factor in any venture that he or she undertakes and adopts necessary measures or strategies that will foresee the investments made are less impaired or totally safe from the identified risk. Thus, the main importance of risk management is to safeguard against unnecessary losses that can be accrued due to lack of implementation of mitigation measures.

Secondly, in any business undertaking or project there are usually numerous stakeholders who have pulled together their individual resources so as to invest in the single project and in order to get the investors’ confidence it is usually critical to implement a risk management mechanism, which will guarantee the capital security of the investing parties. Siems (1996) stated that as a part of any business plan it is usually crucial to spell out the potential risk of the project and how well the proposing party is ready to handle the risk identified. This is usually meant to gain the trust of the prospective investor by making an assurance that the money invested into the project is safe, and chances of making losses are minimal.

The process of risk management can be used to evaluate different investment options, so as to establish the best option that offers a considerable degree of risk with a highly excessive return (Hallenbeck, 2006). Through analysis, investors can look into different options gauging them on their level of risk, mitigation tactics and the likely outcomes, the result of this analysis will then influence the investment decision (Moteff, 2005).

Implementation of a proper risk management mechanism will ensure the attainment of projected sales level or successful completion of a project. This further guarantees that the project will generate adequate cash flow throughout the entire period thus enabling the attainment of the stipulated short term and long-term objectives.

Proper risk management strategies can identify to a business organisation when to invest in a particular line of business, which has less risk at the time and high returns, and also when to pull out or reduce investments in that particular line of business. This gives the business organisation an opportunity to take advantage of a seasonal business environment, which can at times have a high risk and low returns in a particular period, and vice versa (Hutto, 2009). For example through a proper risk management strategy a hotel business will be able to know when to pump in more capital into the business (during tourism peak season), and when to reduce investment by lowering the staff number or other operational expenses. This prevents the hotel from incurring losses during the low peak seasons.

Mostly in building construction projects and financial investments, risk management influences the decision-making process and also how different stages of the projects can be approached. This is because risk management will highlight on certain settings, conditions or environment which have high propensity of creating uncertainty or negative outcome. Relying on this information decision makers change how they normally approach things so as to avoid triggering situations that generate a negative outcome for the project.

According to the writings by Gorrod (2004) it is vital to note that among the significance of implementing risk management strategies in projects or in business ventures is to satisfy the set criteria which are required before certain undertakings are adopted; the potential risks should have been identified as well as their mitigation tactics. At times, risk management is adopted so as to ensure a project or a business venture does not in any way violate certain rules or standards that can jeopardize the position of the project (Borodzicz, 2005). For example, for banking institutions they have to establish risk management strategies that will ensure their clients are able to honour their loan repayment schedule on time, which will further guarantee them a steady cash flow that will enable them to pay for the normal operational costs and also honour customers’ cheques, as well as payment demands for their deposits (Hallenbeck, 2006).  By securing a steady cash flow, the banks are able to maintain the minimum capital requirement that is stipulated by the Central Bank. In case, a bank ignores to set a comprehensive risk management strategy, it exposes itself to various disadvantages such as loan defaults by the customer and in order to cover for the shortfall they will have to lower their minimal capital requirement at the central bank, which is a violation of the minimal capital requirement law and also an infringement of the agreement of the Basel Committee that prescribed on the minimal capital requirements for all banks internationally.

Lam (2003) lauded that the Basel regulations have aided in customer protection and in order to ensure strict compliance of these regulations, the UK government ensures that banks provide evidence of strict compliance to these requirements so as to get government tenders and also to participate in major businesses. The Sarbox regulations (derived from the United States’ Sarbanes-Oxley Act of 2002) which require that public companies, their management and also accounting firms adopt enhanced reporting standards for financial statements has also helped increase investors’ confidence in corporate financial statements. The UK government highly emphasise on the implementation of these key regulations in all major commercial enterprises because they are highly effective risk management measures that accrue a lot of benefits to the firms as well as the customers.

2.3 Project Risk Management Process

Referring to the studies conducted by Tapiero (2004), project risk management is a process that follows five distinct steps that begin with identification of risks then assessment of the risk, quantification of the risk identified, followed by risk response planning and lastly, monitoring and controlling the identified risk.

2.3.1 Risk identification

This is the initial stage of risk management, and events are identified, which if triggered, will lead to considerable damage or loss. The identification process is two ways it can either identify the problem itself or the source of the problem. When identifying a risk from the source point, it is critical to acknowledge that the source can either be internal or external to the organisation and these may include; the surrounding climatic condition, the organisation’s workforce or stakeholders of the organisation or project. When identifying risk as the problem itself, this entails identifying the underlying threats such as loss of capital investment, mishandling of vital and confidential information or threats arising from opposing groups or legal actions (Van et al. 2004).

In reference to the studies completed by Rendlemen, (1999) there are various methods of risk identification and key among them include; common risk checking in a particular industry, which is identifying list of a business organisation from a list that is already available and contains risks common in the pertinent industry. The second methodology of identifying risk is through taxonomy-based risk identification whereby risks are identified from feedback of filled questionnaires (Hillson and Murray-Webster, 2007). In the taxonomy-based risk identification methodology, similar questionnaires are distributed to numerous participants and they are each asked to classify risks in all the different practice areas. The classified risks in each questionnaire are then compiled to identify the most common risks in all the practice areas of the financial sector.  Thirdly, there is scenario-based risk identification whereby different scenarios are created, and in case a certain event leads to unintended scenario, than that event is identified as risk (Hillson and Murray-Webster, 2007). Fourthly, there is the brainstorming methodology, which is mostly used by start-ups or in scenarios that are new and do not have already identified set of risks. Through brainstorming workshops, participants bring forth likely risks, which are then debated upon by others and if they jointly agreed upon then it is listed as a risk. The fifth and also the most common methodology of risk identification is objective-based risk identification which denote an event as risk if hinders the attainment of the set project or organisational goals.

Stoneburner et al. (2002) stated that the methodology of risk charting is the most comprehensive and reliable since it integrates all of the above methods. Risk charting can be done using different approaches, but commonly it is done by listing resources that are at risks then the threats to the resources and factors that can either catapult or lower the risk levels. Alternatively, the threats can be assessed first and then resources that are likely to be affected and the consequence of each identified risk. For example in financial investment; the customer or fund manager may identify risk through risk charting by first enlisting possible scenarios that may cause a drop in value of share price such as bankruptcy law suit against a bank, death of a key management official and enactment of government regulations that is unfavourable for the normal operations of the bank (Hillson and Murray-Webster, 2007). After enlisting the threat and possible scenarios that may cause, the next step is to identify the impact of the fall in the value of share price, which might be the bank going under receivership, customers clearing their accounts or investors dropping their share holdings of the bank.

2.3.2 Risk assessment

Once risks are identified they are analysed to establish the extent of their impact and the chances of occurring. The extent of the impact of the risk can be easily measured in the case of a collapsed building or loss arising from the exchange rate, but in other instances, it is usually impossible to measure.

Risk assessment is usually conducted to ascertain the viability of a particular investment option; for example, a more risky investment is not advisable for a risk averse investor. In projects such as building construction, risk assessment mainly entails evaluating whether the construction projects can be successfully completed, whether the building can withstand harsh conditions such as flooding or earthquakes and also if they are likely to be a high number of interested tenants of occupants of the building under construction. However, it is pertinent to note that the riskier an investment is the more returns or rewards it is likely to gain in the markets, this according to Moteff (2005).

Risk assessment is also used by the management team to predict on a company’s future performance. For example, if the levels of risk pertaining to liquidity, operational or credit, are minimal the management will be right to assume that the business will survive even in the future.

Lenders whom are referred to as buyers in the financial market do use risk assessment reports before investing in listed companies, so as to evaluate whether the company is likely to repay their investment or not. According to Gorrod (2004), risk assessment is also another way through which companies can carry out stock valuation and predict price movements in the future.  Through risk assessment, companies can implement necessary measures to mitigate the effects of such risks and in the long run lure more investors to invest in the company’s stocks and shares.

However, according to the studies conducted by Flyvbjerg (2006) it is rather difficult to assess risks such as geopolitical risk or economic risk as theserisks are out of the control of the financial market and hence neither can they be controlled or measured.  Political and economic risks happen at unexpected times, which could be due to various reasons that include natural calamity like the floods or earthquakes, terrorism scare or attacks and even economic meltdown or recessions.  Consequently such risks are hard to measure, but necessary steps have to be adopted to mitigate their effects.

2.3.3 Risk quantification

Altemeyer (2004) stated that risk quantification is a process whereby risk is measured or described as a quantity, and currently there are various theories and formulas that try to quantify risk but the most commonly applied is the composite risk index, which is obtained by multiplying the probability of risk occurrence and the impact of risk event.  Both variables are presented on a scale of 1 to 5, and a smaller number represents either low chances of occurrence or low severity of the impact of the risk occurring and a higher number on the scale represents either higher chances of occurrence or maximum severity of the impact of the event. It is, however, of the essence to note that quantification of risk is limited and usually different techniques of quantification apply in different fields or contexts.

For example, Borodzicz (2005) stated that there are two generally applied and comprehensive techniques for measuring risks at the stock market that can also be applied at the general business field, and they include; the standard deviation method and the co-efficient variation method.  The standard deviation method measures the dispersion from the mean or expected cash flow; it is always prudent to incorporate the risk premium rate to arrive at the rate that it is to be used i.e. risk premium rate will be added to the risk free rate to get a composite rate that can be used to discount future cash flows, significant to note is that the higher the standard deviation the riskier the stock is assumed to be.  The co-efficient of variation is a relative measure of risk because it considers the risk against the expected cash flow it is used to compare stocks of unequal values, the higher the co-efficient of variation the higher risk of the project.

With regards to the stock market, Jensen (2009) stated that investors can use the historical volatility of interest rates to measure its risk, and there is also other comprehensive ways of which this can be measured, and it involves using mathematical models to forecast interest rates scenarios.  Credit risk is easily measured from the credit rating agencies that give credit rates to companies and their stocks.  Liquidity risk can be assessed using the bid-offer spread, the less the spread is the less risky the stock is and when the spread is long the more risky the stock is (Lintner, 2005).

Operational risk can be calculated using three different approaches that include; standardized approach, basic indicator approach and the advanced measurement approach. Both the standardised and basic approach assesses capital requirements based on revenues while the advanced measurement technique uses risk measurement techniques which have been established by the industry.

Other example of risk quantification in project management are given by Kruger et al. (2012) who stated that in a construction project the risk of a building falling or a fence falling is quantified by adding up the total amount used to put up the fence or the building i.e. material used plus the labour fee for workers contracted.  In health, risk is quantified by adding up the total number of people who will be affected, the total cost of treating each of them, and also the productive hours lost by the patients while they were suffering from the health risk. Security risk such as burglary is quantified by adding up the value of the goods that will be stolen, value of the damage to property, cost of re-constructing the damaged property and harm or loss of any human life during the burglary.

The key element of risk-based frameworks for allocating resources is that starting point is risk not rules. Risk-based frameworks require regulators to begin by identifying the risk that it is seeking to manage, not the rules it has to enforce. It is the business’s risk appetite that determines which risks to treat or tolerate. Based on the identified risk universe, the organization then determines its risk appetite through input from senior management, the board, and the business owners. Tolerance levels must be defined for a period of time that takes into account the loss of funds, functions, or the ability to deliver services to the market. It is from here that the company determines whether the risk is significant in terms of its appetite or not.

2.3.4 Risk response planning

After performing the three steps, the next stage is drawing up a mitigation plan for the risk so as to reduce its chances of occurring, the impact of the risk and if possible total elimination of the identified risk. Alternatively, Alexander and Sheedy (2005) stated the if the three options are not viable then the risk can be transferred to another party through outsourcing the affected business process or the organisation can as well acknowledge the chances of occurrence and the impact of the risk and the factor it on its budget or future plans.

In the writings by Bent et al. (2003) they are quoted saying that risk avoidance is the most effective solutions for all risks but without taking any risk then, an investor or business organisation should not expect any profit. Risk avoidance is usually done by not carrying out certain activities that might trigger risk from occurring. According to BebchTaiwan 2008, risk reduction is done through adopting certain strategies that reduce the impact and probability of occurrence of risk. For example, performing proper electrical wiring and installing fire extinguishers within a building will reduce the chances of fire outbreak and also the extent of damage in case a fire outbreak occurs. With regards, to risk sharing Roehrig (2006) stated that risk can be shared through outsourcing or insurance whereby the third parties, which are business process outsourcing centres and insurance companies, will both share in gains as well as a burden of loss with the business organisation. With regards to risks that cannot be shared or transferred; they are simply retained and at times, it could be because of cost of insurance against the risk which is much higher than possible losses that can be accrued in the event of risk occurring.

2.3.5 Risk monitoring and control

After the implementation, of the risk response plan; the subsequent step monitors the efficiency and performance of the risk management mechanism. This stage will actually check whether the response plan that has been implemented lowers the probability of the risk occurring and also whether if the risk occurs the severity of the impact will be much lower or not. If inefficiencies are noted within the response plan, then control measures are undertaken so as to obtain maximum performance of the risk response plan.

Covello and Allen (1988) noted that the initial risk response and planning is usually never adequate for risks being faced and more so risk that will be faced in the future. Therefore, risk monitoring and control should be frequently reviewed so as to ascertain whether the initially implemented risk control measures are achieving the desired results or not. Secondly, to examine any changes of risk level within the environment and this is usually common with information risk whose level changes immediately there is new information.

2.4 Why it is necessary for risk management iteration in the project life cycle

In an ever evolving environment where nothing seems to stay constant, and there are always new trends cropping up it is totally unconventional to maintain a risk management strategy for more than a year or two without reviewing the plan and making necessary amendments. Specifically, in project management there are different cycles which call for different risk management strategies, and hence in project life cycle, risk management strategies are usually reviewed and updated regularly. Considering different contexts, the review of risk management plan may be facilitated by; a) introduction of new laws, b) amendments of existing laws, c) introduction of new products and services, d) difference in the way work is done i.e. from manual to use of information technology, e) climate change, f) introduction of new personnel into the project, g) change of the objectives of a project and h) change of source of finance or amount of resources allocated or required for the project. These new issues cropping up according to Hillson and Murray-Webster (2007) will undoubtedly influence or change the source of the problem, as well as the problem itself, and expectedly the strategies of risk mitigations will have to be reviewed in order to factor in the new severity of the risk and well as the probability of occurrence.

Keller et al., (2006) in their studies documented on iterative risk management framework to articulate options in a project that are bound to be affected by climate change. In their studies, they presented the below illustrative figure which demonstrates on the iterative nature of the climate policy process. The figure shows two quarters where decisions are made, and the other two quarters represent the decrease in severity of the impact of the risk and reduction in the probability of occurrence for the risk. The arrows around the circle represent a range of outcomes and decisions that undertaken during a project life cycle.

Source; http://www.ipcc.ch/publications_and_data/ar4/wg3/en/figure-3-37.html

From the figure, it can well be summarized that the iterative risk management framework has two key stages in each project life cycle whereby the existing environment is observed to identify changes and their impact on the project. The change could be on the surrounding weather pattern or the demographics of the pertinent population. The second stage after learning environment is to act on the risk management plan and then implement the changes learnt to the measures that had earlier been adopted for managing risks. This process as stated by Gorrod (2004) is repetitive, and it is usually conducted in intervals that depend on the type of the project and also the concerned environment for example social, political, technological or economic environment Gorrod (2004). The iterative risk management plan is beneficial from the sense that new sources of problems, as well as problems, are factored into the plan, and even new ways of risk mitigation are factored into the ever evolving plan. Additionally, with an iterative risk management plan the risk mitigation measures are always up-to-date and ready to tackle any new challenge arising (Cooper, 2010).

Referring to the studies conducted by Bent et al. (2003) they gave case based examples of iterative risk management plan in projects of different fields. For example in a construction project, there is usually a risk management plan pertaining to the health and safety of the workers, and in regards to this plan usually recommends that all workers within the site to wear gloves and a construction helmet. However, in case there is change in construction equipment/ materials or the existing laws that govern construction projects that now require all workers to be issued with protective eye glasses, the iterative risk management plan will have to factor in these changes. The adoption of this measure will protect workers against any harmful danger on their eyes that may arise as a mishap of the material used or the equipment. Alternatively, as stated by Gorrod (2004), the issuance of the protective eye glasses to the work force will be to protect the project from being shut down by the authorities due to failure of implementing the new law that requires all workers in a construction site to be issued with protective eye glasses.

According to Dorfman (2007) the most iterative risk management plan is in farming projects, which is necessitated by the ever changing and unpredictable weather patterns.  For example, an iterative risk management plan against heavy rainfall is usually revised when weather forecast predicts low rainfall levels in the future, the measure adopted in this case is a reduction in the insurance premium paid periodically (Grace and Robert, 2003). Alternatively, an iterative risk management plan against drought will also be revised incase the weather forecast predicts adequate future rainfalls, and in this regard, the farmer may even scrap off the insurance against crop failure due to drought.

With regard to the banking industry; banks are always faced with credit risk that can eventually lead to bankruptcy and closure of the entire bank, which can as well affect the financial market and the economy at large (Hillson, 2007). It is for this reason that the central government through the central bank always implements measures such as the minimal capital requirement to protect against such risk. The establishment of the minimal capital requirement is usually determined by the prevailing economic situation. Grace and Robert 2003 state that during robust economic times, the minimal capital requirement is usually lowered, and during harsh economic times, the minimal capital requirement is usually increased so as to further cushion banks against credit risks. Banks also reflect this in their iterative risk management plan (Grace and Robert, 2003). For example, when the minimal capital requirement has been lowered the probability of occurrence as well as the impact of the severity of the risk, is usually lower and hence banks lessen the conditions of borrowing to their clients. However, when the prevailing economic condition is rather harsh, banks revise their iterative risk management plan by introducing tougher conditions for borrowing customers; this measure is undertaken so as to protect the banks against customer defaults on loans borrowed (Bollerslev et al. 2008).

2.5 Enterprise Risk Management

Referring to the studies conducted by Tysiac (2012), Committee of Sponsoring Organisations of the Treadway Commission (COSO) has been described as a voluntary organisation in the private sector that is predominant in the United States, which was established in 1985 to investigate and issue out recommendations on fraudulent corporate financial reporting. Its key mission is providing professional guidance to the management of enterprises and state authorities on vital functions pertaining to financial reporting, fraud, enterprise risk management, internal control, business ethics and organisational governance (BebchTaiwan, 2008). In respect of its mission, COSO has established an internal control framework that can be used as a reference point by government bodies and business organisations when conducting an assessment of their own internal systems.

In respect to enterprise risk management, COSO developed a model which can be applied by the management of an organisation when they are trying to assess and improve their enterprise risk management. In this model, Hopkin (2012) noted that risk has described as scenario or event that has potentially negative impact in the aforesaid enterprise. The severity of the risk can be either felt by the enterprise as a whole, the capital and human resources, services and products offered by the enterprise or the end-users of the enterprise products and/ or services. Moreover, the impact can even affect the external environment, market or the surrounding community (BebchTaiwan, 2008).

With regards to the banking industry, Nicholson et al. (2005) stated that enterprise risk management considers collective risk in this industry, which include operational risk, market risk, interest rate risk and credit risk. Consequently, the COSO enterprise risk management model prescribe that every identifiable risk can have a pre-established plan to tackle the possible consequences that may arise as a result of the risk occurring.

Alberts et al. (2008) noted that, in 2001, COSO devised an integrated framework for enterprise risk management after cases of numerous failures and business scandal of giant corporations, which heightened the advocacy for effective corporate governance and comprehensive risk management. These efforts led to the enactment of the Sarbanes-Oxley act that emphasised to public enterprises on the establishment of internal systems of control that are not only certified by the enterprise’s management but also an independent auditor who confirms the effectiveness of the internal control system (Hillson, 2007). The latest edition of the COSO enterprise risk management includes an integrated framework that is broader and seeks to ensure that the established internal control system that can provide reasonable assurance to the enterprise on compliance with relevant laws and regulations, reliability and validity of its financial reporting, efficiency and effectiveness of its operations and attainment of its overall mission and goals (Cooper, 2010).

Crockford (1986) stated that the enterprise risk management-integrated framework has eight key components that aim at addressing the ever increasing demand for risk management in enterprises. The components include;

  • The internal environment, – this in the banking institutions sets the tone how risk is perceived, and the risk appetite.
  • Objectives setting-this prescribe that the enterprise should first establish its main objectives before potential events can be identified as risks;
  • Event identification- this component guide on risk identification both in the internal and external environment;
  • Risk assessment- risks are assessed to determine the impact as well as the probability of occurring;
  • Risk response-the management will devise appropriate measures and mitigation tactics so as to lower the impact or eliminate the chances of the risk occurring;
  • Control activities-procedures and policies are developed and enforced so as to ensure the risk response achieve its objectives;
  • Information and communication- the integrated framework prescribe for information to be identified and relayed to all concerned parties.
  • The monitoring component in the integrative frameworks requires periodical appraisal of the risk response plan and modification to areas that are perceived outdated by events or ineffective.

It is beneficial to note that the COSO enterprise risk management-integrated framework totally relies on human judgment and, therefore, it is prone to human errors that can be as a result of bias and lack of informative information. However, the extent of human errors on the decision making process regarding risk management is minimized by the roles played by internal and external auditors who collectively assess the effectiveness of the control system established within the framework (Hubbard, 2009).

2.5.1 Office of Government Commerce (OGC)

The Office of Government Commerce is a department under UK’s central government and it is aligned to the Efficiency and Reform Group which is part of the Cabinet office and it mainly operates through the executive agency of the central government procurement service. The main mandate of the department is to offer support through negotiation of efficient services and provision framework, and also through policy and process guidance for the procurement and acquisition process of government enterprises. The primary goal of the department is to gain value for taxpayers’ money and also guarantee the taxpayers optimum delivery of services (Porteous and Pradip, 2005).

The OGC has models that support best practice of programme and project risk and service management. One of these models is Management of Risk (MoR), through which the department offers best practice guidance to all UK organisations on risk management. The best practice guidance covers the key concept of risk, risk identification, ownership of risk, risk assessment, risk appetite, response to risk, review and reporting of the risk management (Wideman, 1992).

Summary of the chapter

 This chapter has presented a review of different scholarly works that touch on various subjects relating to the objectives as well as the topic of this dissertation. From the review, presented above among the notable facts is that the best method of responding to a risk is by avoiding the risk; however, this is not possible in a situation whereby either the individual or business organisation wishes to generate a substantial amount of profit. In the case of projects be it financial investment projects or building construction projects, some certain risks are taken up by the project managers because they have already being identified and equal measures have also been implemented to reduce their likelihood of occurrence and severity of impact. Secondly, in the risk identification process it is indispensable to acknowledge the difference of what can be termed as uncertainty and what can be termed as risk. Thirdly overemphasis on the risk management process can hinder the successful completion of a project or even kick starting of the project. For example, when undertaking a building construction project along a coastline the risk level are usually high because of likelihood of unforeseen natural calamities such as earthquakes, tsunamis and tornadoes, among others, and if the project manager overemphasis on putting up necessary safeguards against such calamities it might end up delaying the entire project and consumer more resources reducing even the expected return of the project. In financial investment projects, overemphasis on risk management process may lead to increase in capital requirement, which will translate to higher interest rates and low uptake of loans and generally minimal return on financial investment projects.

  1. Chapter Three: Research Methodology

 This chapter details the research methodology employed in this study. It is widely noted that most researches are usually carried out through primary and secondary research. However, in this research only the secondary research method will be applied because of abundant and reliable information that is available on numerous scholarly literatures, articles and internet sources. In secondary research or research based on literature, information is usually gathered from multiple academic sources such a valid websites, textbooks and journals usually from sources such as Business Premier and Emerald. The choice of secondary research for this paper was informed by the fact that the topic was initially finalised after a thorough secondary research, which helped in devising the research objectives, and aim of the entire study. The first part of the secondary research has been displayed in the literature review section. Saunders et al. (2007) cite that secondary research is advantageous because the data that are sought after already exist and the researcher can evaluate its validity before using them.

 3.1 Research Philosophy

This piece of research will be from a positivist point of view. This philosophy has been selected as it encompasses building bridges between risk appetite/ tolerance alongside risk management in the banking industry and the investment banking industry. Previous studies, research and theories, are also to be used in order to acquire further knowledge, ‘As knowledge that is arrived at through the gathering of facts provide the basis for laws’ (Robson, C., (2002). The purpose of this perspective is to establish ideologies and ensure the objectives of the project are achieved.

Additionally the research will apply the use of epistemology Interpretivism (analysis of the meaning of peoples’ action as well as others) and critical realism. The philosophy of interpretivism is beneficial since it advocates for equal consideration of divergent opinions from various scholarly works, rather than perceiving such divergent opinions to be inaccurate data. In the adoption of the philosophy of critical realism, the researcher will ride on the fact that reality is a creation of social factors that are surrounding him, which cannot be understood independently from the surrounding social factors (O’Leary, 2004).

3.2 Research Approach

The researcher collected various materials having information of risk appetite and risk management from various Taiwan scholars. The materials that were not relevant to Taiwan were eliminated. The online databases from various Taiwan financial institutions and banks were collected. The materials that touched on the two banks were given priority.

The inductive approach aims to condense extensive and varied raw text data into a brief, summary format. Secondly, to establish clear links between the research objectives and the research findings. 

3.3 Data Collection

In relation to the data retrieval methods, the use of scholarly works, journals and other literature will be the only means of gathering data, which will help in answering the research questions and also attaining research objectives. Data collection will only be limited to a source of literatures that have been used in the module or which are particularly related to risk management, project management, practices in the banking industry and also in the investment banking industry.

This form of data collection will require less time compared to when both secondary and primary data collection processes are conducted. The reason is that the researcher will only limit his data collection to libraries, cyber cafes or on personal computers unlike when carrying out primary research, which would require the researcher to conduct actual field research.

3.4 Qualitative vs. Quantitative Approaches

There is a distinct difference in the use of qualitative and quantitative research approaches as both methods are used for entirely different purposes. Quantitative research uses mathematical and statistical methods to interpret and evaluate the results of data collected using tools, such as questionnaires. This suits the belief of Fred Kerlinger who stated “There’s no such thing as qualitative data everything is either 1 or 0” (Creswell, 2002), this can be perceived to be true as quantitative research involves the analysis of numerical data. It is significant to note that the quantitative approach will be applied in this study. Noor (2008) stated that quantitative analysis of data is a process that is based on the amount of data collected from the identified materials such as financial statements of banks and investment banks. This information is often accurate and not prone to human manipulations.

Qualitative research seeks out the why, not the how of its topic through the analysis of unstructured information (Ereaut, 2007). It is an approach, which one could say, takes insight into human behaviour, as human behaviour is significantly influenced by the setting in which they operate or occupy in; thus one must study that behaviour in those situations. Research must be conducted in the setting where all the contextual variables are operating (Marshall, 1980). Under qualitative analysis Neil (2007) states that qualitative data analysis is the analysis of data which is based on meanings spoken through words or personal expressions from the respondents. Qualitative analysis of data is one of the major methods for data compilation and interpersonal interviews.

3.5 Research Strategy

 It is pertinent to note that, in a dissertation, the research methodology is particularly significant since it validates that the secondary research performed is valid and trustworthy. The research strategy adopted for this study as already noted in this project will primarily seek to gather information from articles, magazines, journals and previous research that were carried out on the research topic (Valenzuela and Shrivastava, 2009).

Only quantitative data collection techniques were exploited to benefit from strategy strengths and weaknesses (Wilson, 2004). Hence, the combined implementation of techniques helped to test assumptions in literature about the impact risk appetite/ tolerance and also risk management in projects as well as in the banking and investment banking industry.

 3.6 Research method

Another aspect that is of immense significance in this research methodology is the research method, which shows methods that the researcher will adopt to answer the research objectives or questions. There are types of research strategies that can be employed in conducting a research study. These include experiments, case studies, survey, theoretical perspectives, cross-sectional and longitudinal studies. It is imperative to examine the case study method and the sampling method that will be applied in this research. SinoPac and E.Sun Banks were used as case studies.

The research entailed investigating risk management and risk appetite from various journals and articles. More elaborate explanation on the nature of the case study as a research strategy was given by Miles and Huberman (1994) in whose view case study represents a way of collecting, organising, and analyzing data’. Secondary method which involves collecting the secondary information regarding a give phenomenon was selected.

In this research, the research will use a case study of a bank and also of an investment bank that majorly deals with the selling and purchase of stocks and securities in the stock exchange market. Through the case studies, the research will investigate the level of risk appetite and tolerance within each firm and also investigate measures in place for risk management. After conducting individual investigation on the two institutions chosen as the case examples, the research will embark on making a comparison and contrasting the findings from the two sides so as to establish the similarities and differences. It is pertinent to note that the institutions financial records and also management will be used as sources of data for the research purpose.

Secondly, the research will employ the sampling method so as to validate some of the data collected. For example, it will not be sufficient to rely on the data collected from the two institutions chosen as case examples without confirming or validating the information. This is because the two institutions are capable of manipulating data and misrepresenting information to suit their own needs or meet certain conditions (Neil, 2007). Thus, the research will sample a few individuals such as banking consultants, an auditing expert, an independent stock analyst and project management consultants. Because of the high number of such individuals in the Taiwan, the research will use the sampling method to select them without any specifications.

The sampling method of choice in this case is simple random that considers a certain size. All the subsets in the sample have an opportunity of being given an equal chance of participation. This, therefore, implies that every one element in the frame is given equal probability in participation. There is no subdivision or partitioning of the frame. Pairs and also triples if they exist are also accorded equal opportunities. This leads to the minimization of bias, in addition to the simplification of, the result analysis process. The variance that may exist between results on an individual capacity in the context of the telephone conversation can be the best indicator of the variance in the entire population. This, therefore, also leads to the simplicity in the estimation of accuracy that the results may have.

There is, however, a high possibility of vulnerability to sampling errors in the use of this Sampling method. This is attributed to the randomness in the process of selection that may lead to a sample that may not reflect the actual make up that is evident, in the two industries. There is also an aspect of awkwardness? That is associated with this sampling method, as it might also be tedious if sampling is intended at populations that are unusually large.

3.7 Validity and Reliability of Results

A debate about the findings of the preceding literatures on risk tolerance/ appetite and risk management in the banking industry, as well as the investment banking industry, inevitably includes a discussion of research, normally referring to the way in which the data were collected”. This research being a phenomenological, all questions are related to theoretical characteristics discussed in the literature review carried out. The process would, therefore, be accurate in collecting, analyzing and sampling data; hence the validity of result would be quite high. In addition, through the sampling method the researcher will identify appropriate external parties to call so as to confirm some of the date presented from different sources (Smith, 1975).

3.8 Research plan

The plan involved with carrying out this research will be comprehensible. This is because it will be only conducted through secondary research meaning that the information required is already there. What will be required from the research are; adequate preparation with regards to collection of the required information, analysis of the information gathered and documentation of final findings.  The documentation of the final findings will be presented in a manner that answers the research questions already enlisted in the first chapter.

 

 

3.8.1 Research plan and time frame

Activity Time Responsible person Expected outcome Critical assumption
Developing research plan By  July 2012 Researcher Research plan Proposal has been approved
Developing sources of data By July  2012 Researcher Data sources Expected sources of data have been gathered
Reviewing sources of data By July 2012 Researcher Reviewed source Data sources developed in time
Developing analysing strategy By July 2012 Researcher Analysing strategy Strategy developed
Collecting data or reading through secondary sources By July 2012 Researcher Data/findings Data was correctly gathered
Analysing data and interpretation By July 2012 Researcher Analysed data

Interpretations

Data has been collected
Writing the key findings and answering research questions By July 2012 Researcher Complete chapter four and five of the dissertation Analysis and interpretation was done correctly
Submitting final report in hard and soft copies By August 2012 Researcher Hard and soft copies of dissertation The dissertation had been defended

 

  1. Chapter Four: Case Study Analysis

The secondary research was conducted with the different tools described in methodology that helped in revealing the influences of risk appetite and tolerance on E.Sun Bank, SinoPac Banks and other Taiwan banks. The findings of the research, based on the articles and other materials presented are as follows.

Restating statement of the Problem

Risk is faced by Taiwan banks, as with most businesses, because of their ability to anticipate the future correctly. Bank behaviour is based on given and expected perceptions of some key variables.  Specifically, the researcher needed to take into account the considerable forms of risk to which Taiwan banks are exposed. Risks were classified as Interest rate risk, Exchange Rate Risk, Credit Risk and Spillover Risk for easy assessment. This was to explore the following research objectives and questions.

Objective: To understand how risk appetite and tolerance influence decisions making in organisations taking E.Sun and SinoPac Banks as a case study.

esearch Question 1: What are the benefits of a formal risk management in Taiwan Banking Industry?

Research Question 2: What is the impact of risk appetite on business conduct under the current economic circumstances?

These research questions are not mutually exclusive and so the importance of analysing each separately.  A Taiwan bank faces an interdependent risk function.  For example, a risk dimension in the area of interest rates might also have implications for exchange and credit risks, and the latter risks might influence the former. For each of these risk categories, the key determinants involved can be identified and for expository reasons, therefore, it is convenient to proceed as if these risks were independent of each other.

Data collection

The data was collected from various articles and journal having information of risk management and risk appetite. Online dataset of the two banks and other secondary materials relevant to the study were also collected. Among the materials were also information that were outdate or irrelevant to the study. This resulted to a voluminous information and hence its reduction to manageable levels.

 Initial coding and data reduction

Secondary materials and information available from scholarly works, journals and other literature were collected. There was a need to reduce data to manageable levels and relevance (Camilla, 2003). Initial coding was significant in the process of analysis since it provided names for pieces of data. These codes comprised of words, expressions or other portions of data relevant to the study (Caldwell, 2003). The initial coding helped in classifying the risks under Interest rate risk, Exchange Rate Risk, Credit Risk and Spillover Risks. All materials containing or having more information on each risk were grouped together. The key words were:  risk appetite, tolerance, decisions making and banking (Michael et al, 2005).

 

The researcher began with a collection of volumes of information from articles and other secondary materials on each risk and gradually reduced them until each of them represented a specific concept. These concepts were essentially units of meaning (Kabala, 2005). Once an understated coding had been finished then researchers grouped up the codes with common meanings that are linked to risk appetite and tolerance in Taiwan Banks with E.Sun Bank, SinoPac Banks on consideration. When varying terms were used to the same concept, the most appropriate label was used as a name for the concept (Donald, 2005). Instead of coding line-by-line or sentence-by-sentence, several researches code following paragraph-by- paragraph while there are those who search for meaningful statements in the text (Camilla, 2003).

Even though open coding looked straight forward, at the start, it was overwhelming. Its aim was to generate as many codes as possible which will fit the data. As the coding was be in the process, the study made comparisons of various incidences, and it was essential to note that some codes were likely to recur more than others (Camilla, 2003). There are also other codes that collapsed that gave room for the development of categories.  The study expected to code and record data during this substantive level, especially from the articles and other journals (Caldwell, 2003).

During selection of words for coding in open coding, it was essential to stay close to the research topic as possible. Picking words that were reflective of what was happening in E.Sun Bank was crucial.  Hence such words were avoided since they tend to drive the analysis, more like a theoretical framework (Donald, 2005). As the open coding continued, codes were compared constantly and grouped gradually and systematically into more abstract categories (Caldwell, 2003).

With the support of other related banks and materials, each bank was analysed separately using the secondary materials. All the information pertaining to risk appetite and tolerance and decision making in each bank was examined.

Analysis of E.Sun and SinoPac Banks

Project risk management according to Robert (2009) is to plan, identify, analyse, respond, and control risk factors throughout the risk management process. This is done by planning, identification, qualitative risk analysis, quantitative risk analysis, risk response planning, and risk monitoring and controlling. According to Shanks (2003), many scholars argue that these risk management core competency skills are most salient in their job as bank Risk Manager.  All of these are beneficial to succeed in any bank risks that they are facing.

In the analysis, it was essential to identify the top five risks managers perceive most salient in SinoPac and other banks and affect decisions-making in any bank. According to Hallenbeck and Lerche(2006), most of the banks consider credit, interest rate, foreign exchange and liquidity risk as the most significant risks that must be controlled. The risks mostly affect decisions making in the bank.

After reducing the available information and restricting it to risk appetite and tolerance and decision making in E.Sun and SinoPac Banks, four general conclusions can be drawn from this research:

 

  • Risk management in E.Sun and SinoPac Banks

 

E.Sun and SinoPac Banks managers believe that it is necessary to form a correct risk management concept, by learning risk management concept of world. The two Bank managers consider risk management as an important part of their job.  However, they have some misleading ideas of risk management in the past which make it take a long time’s effort to lay advanced and correct risk management concept in the minds of bank staff (Michael et al, 2005). Despite that many Taiwan Bank managers have realised the importance of bank risk management theoretically in mind, many banks in practice and operation still pass on the ideas. First that operation scale is too much emphasised so risk management is put on the opposite side of business development mistakenly, with the thought that risk management is to make business staff in trouble, and without considering risk control same material with profit creation (Robert, 2009). While some risk, managers simply think that risk control means less business and avoids risk bearing by denying business, which cause the failure of many available business and the decrease of anti-risk ability of banks. In recent years, both E.Sun and SinoPac Banks and other Taiwan banks are trying to set up correct risk management concepts. These efforts will predictably last till the scientific risk management concept is rooted in every staff’s mind of banks.

 

  • Credit risk management and how the two banks deal with it
  1. Sun Bank

In the aspect of credit risk management mechanism, the bank managers is unanimous in realising that credit bank risk management is a systematic strategy, which needs the coordination of many factors, in order to reach the goal of lowering the bank risk (Donald, 2008). The two banks under study have certain risk management mechanism, but it is a basic mechanism of one stage, or a mechanism targeting at individual peculiar risk as credit risk. Therefore, from the macro angel, E.Sun Bank still have the problem of missing risk management mechanism, which is indicated by incomplete risk management system, improper system implementation and imperfect monitoring mechanism among others (Michael et al, 2005). The missing of this system will cause the lack of basic structure in effective operation of enterprise-wide risk management, and stand in the way of risk management system formation.

 

The managers emphasised the enterprise-wide risk management. Being different from traditional risk management that focused on credit risk, modern bank risk management also pays attention to other risks, such as market risk, liquidity risk, operational risk and legal risk (Robert, 2009). It not only treats possible capital loss as a risk, but also deems bank reputation and personnel loss as risk, for which the concept of reputation risk and personnel risk are put forward.

 

In the aspect of risk management culture, the respondents’ banks already have certain risk management culture consciousness, and realise that they need to create a significant risk management culture, to promote the risk management work of whole banks. However, at present, the banks still have not formed advanced risk management culture (Donald, 2008). Risk management departments and business departments seldom eliminate the culture differences by communication, and the conflicts between foreground and background are always solved passively instead of being solved by communication.

 

  1. SinoPac Bank

For SinoPac Bank, it has been suggested earlier that reserve holdings are negligible. This means that they exploit income producing avenues to the maximum at least in the short run. Presumably, the deficit costs of inadequate reserves must not be high during normal times given easy access to the interbank market and parent institutions, while the opportunity costs of incomes foregone is rather high. The need for an adequate capital is of crucial importance over the longer term (Lerche, 2006). To protect against this risk it, the banks would be operating with high capital to asset ratios. In recent years, however, observers of the Taiwan currency market have been alarmed at the decline in these ratios for most banks. This decline indicates a greater willingness by banks to take the risk and an acceptance of reduced protection against it (Michael et al, 2005). The problem is further compounded if we were to account for the erosion of capital resulting from inflation since most of the bank’s equity consists of monetary assets. This erosion of the real value of the SinoPac Banks capital puts on added pressure to be fully loaned out so as to generate increased earnings to cover for inflation (Graham, 2008). The observation that SinoPac Banks  has resorted to operating with lower capital to asset ratios can be theoretically justified, if, even for the longer term horizon, the expected opportunity cost of holding inventories of capital exceeds the deficits cost of portfolio adjustments to a general collapse (Lerche, 2006).

 

  • Loan risks in the two banks and their management in relation to decision making

 

This risk arises for the bank from the possibility that due to circumstances special to the borrower, there will be a delay in loan repayment or default on the loan. This risk is faced by any commercial bank and is not peculiar to the Taiwan currency operation. This risk takes on an added dimension for an E.Sun Bank because loans are generally of large denominations, and unsecured.  The lack of collateral for loans granted is attributable to the intensity of competition among banks and the high standing of borrowers.  In recent years, the usage of formal collateral and guarantees has increased as banks have sought some security on loans granted to oil deficit countries (Donald, 2008).  During normal circumstances when banks use floating rate loans, match deposits to loans in terms of currency and maturity of the roll-over period, the only risk that they still face is the credit risk (Lepetit and Tarazi, 2008).  This risk is, therefore, most significant, and least in the banks power to control.

 

The impact of loan losses can be felt on the level of cash reserves held by E.Sun Bank and its capital account. Changes in cash reserves are a consequence of granting and repayment of loans. When loans are granted cash reserves decline while repayment increases these reserves. Default (or delay) by a borrower on a loan due means that an expected repayment or inflow of cash did not materialise. A bank’s cash reserves are subject to this uncertainty. Losses in the capital account are likely over the longer term, most obviously, because of insolvency of the debtor. A bank has information on the ability of respective debtors to repay their obligations in a probabilistic sense only (Robert, 2009). These losses can also stem from short-term losses on cash reserves (due to insolvency or delay by debtors to repay obligations) which force bank portfolio rearrangement such as borrowing of deficits at unfavourable rates, incurring of losses in selling of assets and transaction cost (Michael et al, 2005).

 

According to Robert (2009), it has already been alleged that Taiwan banks operate in perfectly competitive markets.  This means that an individual bank is a price taker and adjusts the volume of its activity in accordance with the interest rate which is beyond its power of control.  This free market determined interest rate is known to fluctuate a vast deal in Taiwan’s Banking Industry.  Since Taiwan banks, liabilities with definite maturity dates during the “normal times”, when confidence in the market remains supreme, banks do not run the risk of unexpected withdrawals (Michael et al, 2005).  They face interest rate uncertainty rather than uncertainty in the maturity of deposits.  Interest rates on assets and liabilities fluctuate freely from day to day, and there is no credit rationing in Taiwan.  Furthermore, it has been observed that long-term interest rates do not diverge a vast deal from short-term rates which mean that Taiwan banks have an expectation of remarkably little deviation of the term structure of interest rates from parity (Donald, 2008). Since most banks are risk averters, a high degree of uncertainty about future interest rates, and term structure of interest rates close to parity, will result in balance sheets being closely matched (Lepetit and Tarazi, 2008).  There will be remarkably little asset transformation and the distribution function of financial intermediation will dominate.

 

  • Exchange Rate Risk and how the banks deal with it

With an inalterably fixed exchange rate, there would be no exchange rate uncertainty and maintenance of open positions in a currency or exchange rate speculation would be relatively safe. With a floating exchange rate system, exchange rate uncertainty has been contented with (Donald, 2008). To limit exposure to expected exchange rate volatility, a bank’s response is likely to be in terms of greater attention to the currency composition of its assets and liabilities. To avoid interest rate risk there is matching of the maturity of the deposit to that of the loan and to avoid exchange rate risk on transactions there is a matching of the currency denomination of the two. If SinoPac Banks balances assets and liabilities by currency class, there would be no net exposure to foreign exchange risk (Robert, 2009). Currency transformation or the buying of “loans in one currency as a result of having sold deposits in some other currencies” would be effected “whenever the difference in interest rates on deposits or on loans differs by more than the transaction costs and risks” (Lerche, 2006). Although pure exchange risk can be hedged away through purchase of forward cover, a residual exchanged risk, associated with premature repatriation, remains (Lerche, 2006). By purchasing a forward contract in dollars, the bank fixes the dollar value of the asset at the time of maturity. If the bank is forced, because of need or external circumstances, to repatriate funds prior to maturity, a net loss or gain is likely depending upon the then prevailing exchange and interest rates.

 

Spillover Risk and Decision making in both SinoPac Banks and E.Sun Bank

Important changes in Risk Management Practices at the managerial level have occurred after devastating effects of the global financial crisis (Graham, 2008).  Using the two banks’ past records and journals, it appears that the bank managers risk management strategies evolved from the maintenance stage, to a growth stage; where the focus is on offering more diversified risk management strategies (Lepetit and Tarazi, 2008).  In a few instances, banks moved to a mature stage where the focus is on ensuring that recently added techniques and strategies are making a significant contribution to the banks overall success.

 

All the bank managers believe that it is necessary to form a correct risk management               concept, by learning risk management concept of world. These bank managers consider risk management as an important part of their job (Donald, 2008). However, they have some misleading ideas of risk management in the past which make it take a long time’s effort to lay advanced and correct risk management concept in the minds of bank staff. Despite that many bank managers have realised the importance of bank risk management theoretically in mind, many banks in practice and operation still pass on the ideas that: operation scale is too much emphasised so risk management is put on the opposite side of business development mistakenly, with the thought that risk management is to make   business staff in trouble, and without considering risk control same material with profit creation (Robert, 2009).

 

While some risk, managers simply think that risk control means less business and avoids risk bearing by denying business, which cause the failure of many available business and the decrease of anti-risk ability of banks (Claessens, 2004). In recent years, banks of the country are trying to set up correct risk management concepts. These efforts will predictably last till the scientific risk management concept is rooted in every staff’s mind of banks.

 

In the aspect of credit risk management mechanism, the bank managers is unanimous in realising that credit bank risk management is a systematic strategy, which needs the coordination of many factors, in order to reach the goal of lowering the bank risk. The banks of in the study have a certain risk management mechanism, but it is a basic mechanism of one stage, or a mechanism targeting at individual particular risk as credit risk (Michael et al, 2005). Therefore, from the macro angel, the banks still have the problem of missing risk management mechanism, which is indicated by incomplete risk management system, improper system implementation and imperfect monitoring mechanism and the likes (Claessens, 2004). The missing of this system will cause the lack of basic structure in effective operation of enterprise-wide risk management, and stand in the way of risk management system formation.

 

The managers emphasised the enterprise-wide risk management.  Being different from traditional risk management that focused on credit risk, modern bank risk management also pays attention to other risks, such as market risk, liquidity risk, operational risk and legal risk. It not only treats possible capital loss as a risk, but also deems bank reputation and personnel loss as risk, for which the concept of reputation risk and personnel risk are put forward (Robert, 2009). Besides, with the trend of more and more internationalised operation, commercial banks pay more attention to the integrative measurement and management of the risk bearing in global range, to prevent all possible adverse events from happening anywhere in the world (Claessens, 2004).

 

At present, the banks still haven’t formed advanced risk management culture (Donald, 2008). Risk management departments and business departments seldom eliminate the culture differences by communication, and the conflicts between foreground and background are always solved passively instead of being solved by communication (Graham, 2008).

 

Conclusion of Analysis

From the analysis, it is evident that the two banks and other Taiwan banks are using various strategies to manage their risk exposures and manage their risks. Risk management has various advantages in the management of the two banks and Taiwan Banking Industry (first objective). Risk appetite is high for bigger organisations compared to smaller organisations in Taiwan.

 

  1. Summary, Conclusions, & Recommendations

The following is the final section of the dissertation that summarises what has been found in this study, conclusions from the findings, and recommendations for future research.

 

There is a long development history of risk management among Taiwan banks taking a close reference to E.Sun and SinoPac Banks. As emphasised by Basri (2008), through decades of development and practices, they have developed many advanced concepts and methods. These banks pay more attention to the management of all risks in the global range, emphasising that risk management should be throughout the whole process of banking operation (Aliber, 2005). They also nurture positive risk management culture and apply mathematic models for quantitative analysis on risk to measure the bank’s risk bearing capacity as a whole (Basri, 2008). According to Bebch2008, inside the banks, risk management is becoming the self-consciousness and activity of all staff from profound theory.

 

Risk is faced by Taiwan banks, as with most business, because of their ability to anticipate the future correctly. This uncertainty about the future influences bank portfolio decisions today.  Bank behaviour is based on given and expected perceptions of some key variables (Dent, 2009).  Specifically, we need to take into account the main forms of risk to which Taiwan banks are exposed because of changes in interest rates, exchange rates and behaviour of borrowers and lenders (John, 2004).  The risks emanating from these variables can be classified as being interest rate, exchange rate and credit risks.

Conclusion

It is concluded that, along with the expansion and enriching of economic development, advanced bank risk management has been developed from single risk management development into the enterprise-wide risk management of all kinds of risks. The risk management technology is developing from quantitative method into more precise and advance quantitative direction (Berger, 2007). The risk management content is richer and richer, and its technology is more and more complicated. E.Sun Bank will introduce advanced risk management concept and technology step by step, to establish enterprise-wide risk management system.

 

Implications

For bank managers, the results of the study may improve their performance by identifying “best practices” and “worst practices” associated with risk management. Best practice risk management techniques/strategies were discussed by these bank managers. The research results also provide information about the effects of using these risk management techniques on bank efficiency.  Knowledge of this information will further assist bank managers in their future risk management.

 

Limitations of the research

The study was limited to secondary information collected from the data sources. The data findings were limited to the secondary data collected from articles and online databases. It is believed that the findings would be different if the sample demographics were different.

 

Risk Management Policies

The first and substantial attempt to investigate the role of risk management policies in banking crises was made by John 2004. John 2004 focuses more on the choice between an accommodating and strict risk management policy. Both studies of E.Sun and SinoPac Banks show that certain risk management policies, namely unlimited deposit guarantees, open-ended liquidity support, repeated recapitalization, debtor bail-outs, and regulatory forbearance tend to increase fiscal costs. Furthermore, in order to prevent loss of confidence that could trigger a bank run and a more harmful crisis, an explicit guarantee to depositors and creditors should be enforced. Forbearance, repeated recapitalization, asset management companies, and public debt relief are examples of resolution policies that are often adopted in this phase. Forbearance and repeated recapitalization policies allow banks that are technically insolvent to continue its operation with the intention of avoiding widespread suspensions and bank closures and restoring solvency (Lepetit and Tarazi, 2008). Asset management companies and public debt relief program are established with the purpose of allowing banks to focus on their core business activity by letting governments or other agency manage their nonperforming loans.

 

There is the risk that capital controls (such as exchange controls) might be imposed in the centre where a bank’s assets are held. Exchange regulations will interfere with movements of funds out of a financial centre (Robert, 2009). Movement of funds between the Taiwan markets is not likely to be disturbed. This risk can be counteracted by granting loans to a potentially feared country in that country’s currency. Another practice that has become widespread in light of currency instabilities is the denominating of loans in several currencies (Hinton, 2004). Taiwan banks also protect themselves against the inadequacy of a particular currency on a loan rollover date. If exchange restrictions are such that are desired currency ceases to be available in sufficient quantity to affect a roll-over, the amount drawn under the loan agreement is due immediately. This should limit the liability of a bank in the event that some currency crisis in the market made roll-over on outstanding loans difficult (Graham, 2008). On the other hand, in the event that during a crisis a majority of the borrowers are unable to repay loans draw down, the credit risk remains.

 

In Taiwan and other markets, since the market is international in nature, the cost of such information gathering on borrower credit worthiness and their usage of funds can be extremely high. A bank, customarily, does not know how much a borrower has obtained from other sources and questions of country risk compound the difficulties of obtaining useful information. E.Sun and SinoPac Banks have tried to keep informed of tendencies in the overall market by active involvement the interbank market. Here, a typical bank acts both as a lender and borrower of interbank funds at the same time (John, 2004). By churning out deposits of a cosmetic kind, this market provides traders “with information both about demand and supply, and it allows traders to stay in close touch with the market’s ‘feel’ for the ability and soundness of individual traders and banks. Trading deposits may in a sense be an efficient way of trading information about individual banks and their techniques” (Claessens, 2004). The costs of this information should be negligible, as indicated by the spread between bids and offer rates on interbank placements. During times of crisis, these costs are likely to increase because of general erosion of confidence. The observed “tiering” of banks in terms of size, credit worthiness, stockholder support and recourse to external assistance reflects the increased cost of seeking information needed to reduce the heightened credit risk during panic conditions of interbank placements. Baltensperger 2002 also suggests that banks cushion the possibility of credit by holding reserves of cash and capital. It is because of uncertainty that a bank holds inventories of reserves and capital accounts. Was it not for these reserves a bank would have to incur deficit costs of borrowing needed amounts at favourable rates, selling of assets at capital losses and transaction costs. The holding of inventories also entails an opportunity cost for the bank in terms of income foregone in not being fully loaned up (Claessens, 2004). If the expected opportunity costs exceed deficit costs, it pays to hold a smaller inventory of excess funds. The optimal inventory size would be one where the marginal deficit cost is equated to the marginal opportunity cost.

 

For E.Sun and SinoPac Banks, it has been suggested earlier that reserve holdings are negligible. This means that they exploit income-producing avenues to the maximum at least in the short run. Presumably, the deficit costs of inadequate reserves must not be high during normal times given easy access to the interbank market and parent institutions, while the opportunity costs of incomes foregone is rather high.

 

The need for an adequate capital is of crucial importance over the longer term. We are interested, because of credit risk considerations, in the protection a bank has against the risk of general collapse due to widespread debtor default (John, 2004). To protect against this risk it would be expected that banks would be operating with high capital to asset ratios. In recent years, however, observers of the Taiwan currency market have been alarmed at the decline in these ratios for most banks (Claessens, 2004). This decline indicates a greater willingness by banks to take the risk and an acceptance of reduced protection against it. The problem is further compounded if we were to account for the erosion of capital resulting from inflation since most of the E.Sun bank’s equity consists of monetary assets. This erosion of the real value of the bank capital puts on added pressure to be fully loaned out so as to generate increased earnings to cover for inflation.

 

The observation that Taiwan banks have resorted to operating with lower capital to asset ratios can be theoretically justified, if, even for the longer term horizon, the expected opportunity cost of holding inventories of capital exceeds the deficits cost of portfolio adjustments to a general collapse (John, 2004).

 

Recommendations

The bank managers which are the main contributors to this study with ideas and suggestions will receive a report of the findings from the study.  Since the data collection came from the bank managers’ risk management skills, the findings from the study should have an added relevance, not only to the participating banks but also to the other banks as well, operating, not just in Taiwan but also in other places.  Since the manager participants were offered a free report of the findings, a variety of requests from the participants have been received. Several of those requests were for more detailed and substantive information, which will also be fulfilled. Therefore, the knowledge gained from this study can flow on to those who find it applicable and advantageous.

 

Because of inherent difficulties of generalizing the findings of the study to all banks, further research is suggested in the following areas:

 

  1. Examine all the real options to understand the value of each one to the bank risk decision- maker and why.

 

  1. Using a case-study methodology, research those banks that have recently managed their bank risks and ascertain why. Further, real options could be discussed with participants from the perspective of preventing failure to manage risks. The case-study approach is suggested because locating sufficient number of banks to collect data using a survey instrument would be tenuous at best or impossible at worst (Lepetit and Tarazi, 2008).

 

  1. Identify the applicability of real option

 

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How Regulatory Law Tackles The Margin Squeeze Problem In Telecom Sector

How Regulatory Law Tackles The Margin Squeeze Problem In Telecom Sector

Table of Contents

Table of contents…………………………………………………………………………………ii

List of abbreviations……………………………………………………………………………..iii

Abstract iv

Introduction. 5

1.1 Why regulatory law serves as a better rule of law in tackling margin squeeze problem.. 7

1.2 The role and power of the regulators (NRAS- National Regulatory Authorities) 9

1.3 The crossing between the sector-specific regulation and the competition law.. 10

1.4 Conditions that detremine a margin squeeze. 13

1.4.1 Vertical integration situation. 14

1.4.2 Essential input 14

1.4.2.1 Essentiality to the downstream competitors. 14

1.4.2 .2 Essentiality for the downstream competition. 15

1.4.3 Downstream margins. 15

1.4.4 The Standards of efficiency. 16

1.4.5 Material impact on the competition. 16

1.4.6 The margin squeeze has to be attributable. 16

1.5 Basic circumstances below which a margin squeeze abuse may be realized. 17

1.6 The Definition and Characteristics of Margin-Squeeze Abuse. 20

1.7 Incentives for dominant telecommunication operators to engage in a margin squeeze. 21

2.1 The correlation between excessive price, “pure” predation, margin and cross-subsidies. 23

sSqueeze. 23

2.2 Excessive pricing and margin squeeze. 24

2.3 Predatory pricing, “pure” margin squeeze. 26

2.3.1 Single product alongside horizontal competitors. 26

2.3.3 Cross subsidies and margin squeeze. 28

2.4Margin squeeze under sector-specific regulation. 30

2.5 Effects of price control mechanisms on margin squeeze. 35

2.5.1Retail and Wholesale markets regulated. 36

2.5.2 Retail markets uncontrolled and wholesale market regulated. 37

2.5.3 Retail markets controlled and wholesale market ununcontrolled. 38

2.5.4 Retail and Wholesale markets ununcontrolled. 38

Conclusion. 43

Bibliography. 44

List of Abreavitions

EC…………European Commission

NCA………National Competition Authorities

NRA………..National Reguratory Authorities

Abstract

Margin squeeze in the telecommunications zone has proved to be one of the chief concerns amongst national competition authorities (“NCAs”), national regulatory authorities (“NRAs”), the European Commission (EC), and national courts. In current times, competition law measures have been put in place in various Member States inclusive of Denmark, Italy, France, the United Kingdom, and the Netherlands. Most current, on 16th November, 2004, the Italian antagonism authority levied a 152 million penalty on Telecom Italia on the bases that, it had affianced inter alia in the margin squeeze abuse. The necessity to avert margin squeeze has again proved to be leitmotiv for NRAs, in their ability as regulators of retail and/or wholesale telecommunication prices. Therefore, from a vague subject that fitted the dominions of academic debate, margin squeeze has proved to be an intensely-discussed practical matter in the telecommunications field. Margin squeeze situations are as a result of the increased rivalry in the post-liberalization telecommunications area. As well, they represent a vital and important contrivance in the commercial plans of new contestants that are seeking rival with obligatory operators. While new competitors have achieved noteworthy inroads in the numerous telecommunications promotions, the majority still claim that their achievement is prohibited by exclusionary measures applied by the executives. Margin squeeze declarations characterize patently in this respect.

In simple terms, a margin squeeze totals a decrease by main occupants of the margin between retail and wholesale prices in the effort of making the entry tough or even encourage exodus. This can well be achieved through lowering retail prices, increasing wholesale prices, or even doing both. Whilst a margin squeeze in current years has been often alleged, results of abuse have also far been occasional. This may be part because of the hardness to demonstrate a margin squeeze exploitation, but with no doubt, also depicts the fact that occupants have dramatically lowered the wholesale and increased retail prices in current years, for completely legitimate motives. This thesis looks at the two apparatus that can be utilized to sanction and/or prevent abuses of marketplace power in the telecommunications sector: sector-specific regulation. This is commonly grounded on the national regulatory frameworks, EC competition law, and/or national and transposing EC legislation. Though each of the instruments has its pro and cons, their associations usually raise important matters, which we look forward to studying in this thesis.

Introduction

The telecommunications zone has remained one of the main sectors where insight has transformed over the period of time. It was viewed, along with electricity and railways that is, distribution and transmission, as one of the business that was a naturally monopoly. First, businesses in this field were high because of several entry difficulties like infrastructure and technology. However, over a long period of time, the governments all over the world have appreciated that the telecommunications business does certainly advance itself to modest practices, because of technology advancement and various regulations to enable this procedure and ensure rivalry.

The past of the business and past knowhow suggest that executive businesses have constantly been con the acceptance of new players into this what has been traditionally been viewed as their lawn. [1] They have the capability to achieve it quite easily as they regulate the substructure that is necessary to get inside the marketplace and which the new occupants cannot reproduce, taking into consideration that the same might have been established over years or even decades. Regulators should ensure that the new competitors can benefit these essential facilities necessary to acquire in the telecommunication markets.

The basic description of a margin squeeze is straightforward in the theory. It is defined as circumstances where a vertically-incorporated dominant business utilizes its powers over an input abounding to downstream competitors to avert them from realizing benefits in a downstream marketplace where the main firm is also vigorous. The dominant business firm could theoretically do this in various means.

Firstly, it could increase the price of input to stages at which competitors cannot be able to sustain a benefit downstream. In other sense, it could involve in below-cost vending in the downstream marketplace, while upholding a benefit wholly through the upstream sale of the input. Lastly, the main firm could increase the upstream input price and reduce the value of the downstream retail product in order to make a big margin in between them. In this case, the rival would not be beneficial except the main firm is actually discerning in the charged prices downstream competitors and its incorporated firms. [2] In contrary, it may in itself be the nondiscrimination clause in Article 82(c) EC. The handover charge, which is downstream firm emoluments to its upstream firm, tends to be similar as the input fee remunerated by the downstream rivals. It becomes superficially true. However, because vertical incorporation makes the main business charge its downstream firms a paper handover price and not at all the real cost confronted by the downstream firm even if the business provides distinct accounts. The opposition, therefore, follows that the implied handover charge levied on downstream competitors is quite higher than the input fee the dominant business’ downstream business confronts.

The only powered statement by the Commission regarding the margin squeeze exploitation is limited into telecommunications Access Notice. The Commission highlights that:

“A price squeeze could be demonstrated by showing that the dominant company’s own downstream operations could not trade profitably on the basis of the upstream price charged to its competitors by the upstream operating arm of the dominant company…. In appropriate circumstances, a price squeeze could also be demonstrated by showing that the margin between the price charged to competitors in the downstream market (including the dominant company’s own downstream operations, if any) for access and the price which the network operator charges in the downstream market is insufficient to allow a reasonably efficient service provider in the downstream market to obtain a normal profit (unless the dominant company can show that its downstream operation is exceptionally efficient)”.

1.1 Why regulatory law serves as a better rule of law in tackling margin squeeze problem

In theory, in case prices are appropriately regulated, the price squeezing should not be possible or if possible, its scope should be limited. Nevertheless, problems arise whenever tariffs have not been rebalanced. It leads to a relatively high cost upstream (access) charges, but synchronized retail prices are below the costs. Having the tariff as the rolling-back of regulation and the rebalancing as competitive markets appearing hold, the effect of regulation is less. However, the question remains whether the regulatory laws could have impacts upon the margin squeezes.[3] The court jurisprudence concerning Justice makes it evident where state controls needs a business to take a particular course of accomplishment that is not competitive, there is no legal duty concerning the part of the business for the infringement of the society opposition law. However, the regulatory law also ensures that, if the regulated enterprises still have the capability to act independently, they must act so as to limit or prevent an alteration of the competition. Telekom could regulate its prices with the price cap baskets and should have done this to inhibit the margin squeezes, which it has identified. In not doing this, Telekom would have abused its assertive arrangement in the upstream marketplace for the local sphere access.

The telecom market has different features from other markets. The telecom markets in Europe were liberalized in the mid 1990s. The current undertaking is stayed active on this market. Prior to the liberalization, this serving would have benefited a legal monopoly. For this liberalization to be flourishing, a regulator and regulations were put in place in order to unlock the appropriate market up to struggle. The regulations ensure ex-ante intervention. [4] They are used to trim down market imperfections. The regulations can also be used to enforce a compulsion upon the current company to allow right of entry to their infrastructure. This enables enterprises to contend downstream. Regulators can also inflict price control regimes and set the level on retail and/or wholesale prices.

Many regulations laws do not impress a complete embargo on the margin squeezes; instead, they merely reduce the incentives and the ability of the serving to connect in such exclusionary conducts. Regulatory laws may differ between sectors and countries, as they are issued by the sector or national particular regulators. [5] The likelihood of negative impacts on the market of regulations laws must be emphasized as it may reduce the motivation to innovate or invest.

Through ex-post government involvement, the competition/regulatory law is imposed to minimize market imperfections, by sanctioning or controlling, restriction or distortion of competition, therefore controlling the misuse of the market power. Competition laws are only appropriate when anticompetitive incidences occur, and competition regulators can only take action under this capacity. A competition authority may authorize behaviour, but has no power to approve new obligations. Enforcement of the competition law ensures recreation healthy business environments.

To summarize, regulatory law serves as a better rule of law in tackling a margin squeeze problem. The powers bestowed on the regulatory associations are broader compared to the competition authorities. They can impose regulations, new obligations, or cumulative duties upon the current margins and are future-oriented. Competition laws can only be used to handle anticompetitive situations. Competition law obligations can be obligatory only if they direct the sector to a more economical market.

1.2 The role and power of the regulators (NRAS- National Regulatory Authorities)

National Regulatory Authorities agree that scrutinizing margin squeezing situations needs a lot of detailed information. Much of the information required is confidential in nature and is usually protected from revelation. Such evidence is usually commanded by the National Regulatory Powers under pressure, thus executing an important load on the business under examination, complainants, and third parties alike.

The evidence necessitated by National Regulatory Powers will continuously include majority or entire of the following:

  • Transfer pricing, revenues, cost of capital, costs, and other accounting and financial information, including regulatory, statutory accounts and management. It is usually on a disaggregated root;
  • Traffic volumes and customer numbers;
  • Business plans, budgets, and internal calculated planning documents, as well as those relating particularly to the firm under investigation.[6]

This information obtained may not automatically represented in the manner it is needed. This leads the officials to construct it into the required form. Providing and obtaining this information are troublesome for firms, whether the firm under investigation, third parties or complainants. Moreover, National Regulatory Authorities might make use of extended research roles and powers under the regulation to execute business to offer this information. [7] Complainants as well as other third parties do not access too much of the information contained in a decision. Therefore, they are disadvantaged in that they are compelled to rely upon openly available information when checking regulator’s decisions and formulating complaints.

1.3 The crossing between the sector-specific regulation and the competition law

At first sight, the aims of competition law and regulation appear to converge concerning a margin squeeze. They both aim at opening appropriate markets up to the competition. Therefore, they both ensure effective and efficient competition. Nevertheless, a closer observation shows that the two policies are somehow conflicting.[8] A complication comes up when an enterprise is caught up at anticompetitive behaviour in the regulated market. This calls for an investigation on which authorities put into effect these rules and the particular rules which are applied to.[9] Subsequently, if more foundations of regulatory law pertain that, win by and more powers have the act, which one must legally act.

The relevant concern is to ensure a dependable policy towards the price squeeze, while guaranteeing some form of coordination between competition law and sector-particular regulations. In practice, these objectives bring about hardships. In many markets, these two policies continue existing next to each other. This is potentially capable of causing more conflicts and overlaps.

The American and European view concerning a sector-specific regulation and competition law differ completely. In the United States, the Supreme Court holds that there is no room for competition law solution once a sector-particular system has been set up. Captivatingly, the Commission appears to have taken the contradictory move towards the Deutsche Telekom situation. The Director General for Information Society and Media and the Director General for Competition of the Commission ensure that the national regulations are obeyed to enhance effective competition. Regulations that impress obligations to a prevailing company maintain the firm’s accountability under the competition law. However, the European law and the national powers uphold authorities to associate to the national competition regulation. On the other hand, the opposition powers are under an accountability to renounce from accepting measures that will undermine or create exceptions to such national regulations.[10]

The issue of connection between the competition law and the sector-particular law was raised again in the Court’s during the DT judgment in 2010. The Court noticed that it is not incredible that these national regulatory authorities could have infringed the legal law. The Court appeared to be reluctant to take statements on the issue further. However, when the Court considered the issue critically, especially the paragraph, which states that the Commission cannot be obliged by any decision taken by the national body, it appeared that it could be snatched from this point that the competition authority or the competition law is in higher hierarchy than the regulator or sector particular regulation.

The price squeeze naturally depends on the regulatory laws. The market is usually regulated applying three different methods or systems. There is a likelihood of full regulation when both the retail price and wholesale price are controlled by a regulator. Additionally, a partial regulation may occur when the downstream prices and wholesale prices fail to be regulated. . The non-controlled cases ascend when the business can fix its upstream and downstream prices freely.[11]

The telecommunications sector is not fully regulated; that is the market regulation is under the price cap system. Therefore, the incumbent in this sector can set its wholesale and retail prices freely. Consequently, the sector can charge prices without considering access costs and its downstream. This makes the price be impossible for competitors to compete with the telecommunication sector. The margin of downstream competitors is usually squeezed, since equally proficient competitors are not be able to offer retail services at the definite price unless they incur losses. It is also possible for the incumbent to use non-pricing approaches in order to close out the market. For example, they can stock products of lower quality or even raise the processing time in orders to strain the downstream rivals. The telecommunications industry is unlikely to use these non-pricing strategies.

1.4 Conditions that determine a margin squeeze

[12]A margin squeeze or price can ascend when a current company condition that is vertically integrated offers an essential contribution to the wholesale clients. It is downstream contestants similarly.

[13]The dominant company can squeeze these downstream competitors through charging them high wholesale prices, low retail prices, or both. Following this strategy for a long period of time, the more efficient or equally downstream competitor may fail to attain enough profit to remain in the market. The margin squeeze may be generated by using unsuitable supply between retail charges and wholesale charges. It is enough to demonstrate that there should be an imbalance between retail charges and wholesale charges as the competition is restricted. The following conditions determine the presence of a margin squeeze in the telecommunication sector.

1.4.1 Vertical integration situation

[14]The vertical integration is a situation where an enterprise is active in the downstream and the upstream market. This vertical integration portrays the double-sided-relationship. This means that, at the wholesale price level, there is relationship between the seller and buyer; at the downstream level, the involved firms are business rivals. This connection is essential as it may inspire the enticement of prevailing premises when elaborating pricing strategies. The vertical integration appears to be the chief factor to the existence of the margin squeeze. In case the incumbent company is only available at the wholesale level, it will be impossible for the firm to get involved in the margin squeeze. The telecommunication area translates this into a case that the current gives access to its local networks, to its subscribers, and its competitors.

1.4.2 Essential input

The contribution of the current company provisions have to be important in one or both of the following ways given below.

1.4.2.1 Essentiality to the downstream contestants

In case the supply is not essential and there exist close substitutes, the downstream competitors may depend on other commodities to produce downstream products. This causes a no-dependence zone on the input prices charged by the prevailing company. The competitors do not have to purchase products from the prevailing company. [15] This makes the dominant company to fear raising prices to prevent losing customers. In this case, essentiality remains a strict supplement to the retail price. This strictness arises as a result of inadequate substitutes when the downstream competitors are unable to interfere with the retail goods production using substitutable or additional products. Additionally, essentiality arises in the infrastructure related sectors when the downstream competitor is unable to economically, rationally or easily reproduce competing infrastructure or substitutes, for example, in the railway sector or the telecommunication industry.

1.4.2 .2 Essentiality for the downstream competition

There should be no alternatives in the retail market depending on another product. Therefore, the input is not important for the downstream competition since the consumer can depend on the substitute. [16] In this case, the price squeeze cannot be effective and appropriate.

1.4.3 Downstream margins

[17]The provided input prices should represent a relatively high and fixed ratio of the downstream prices that bring about inadequate profitability for downstream rivals. Therefore, the margin has to be adequate to allow the competitors to obtain a rational benefit in the downstream market. In case a reasonable benefit is not obtainable, the retail market is foreclosed. There is importance of such a situation, as it differentiates exclusionary abuses and a real margin squeeze. It acts like voracious pricing.

1.4.4 The Standards of efficiency

Competitors and the vertically integrated company should be equally efficient. Whenever the business rival is not as efficient as the prevailing company, a negative or low margin between the retail and the wholesale price is developed from other factors. It stands with the exception of the downstream and upstream prices charged by the prevailing company. Once the downstream contestants are equally or more proficient than the a leadering business, a low or negative margin may show a margin squeeze.

1.4.5 Material impact on the competition

After the above conditions are achieved, it is important to consider whether the prevailing company’s conduct has ever had or is likely to experience material impact on the competition. The consideration is based on the following issues:

  • How persistent the margin squeeze has been. The margin squeeze should be held for enough period of time so that it will have material impacts in the market;
  • If the margin squeeze is leading to material risk to downstream contestants or not;
  • If the margin squeeze leads hazards to customers in the form of the reduced choice of products or higher prices in retail goods.

1.4.6 A margin squeeze must be attributable

It has to be assessed to determine whether the margin squeeze is really attributable or not to the prevailing company. Under this situation, the incumbent is checked whether it had the capacity to adjust to the retail price for the sake of the consumer. [18] The pricing approaches of the prevailing firm enterprises have to be accounted for; that is, i.e. downstream products can be retailed at a low price as well as by a price cutback with a new intention or entity than the anticompetitive consequences. This pricing approach may force a short term market approach enhancing market situations on a short notice. For a behavior to be impartially acceptable, the conduct has to be proportionate.

1.5 Basic circumstances below which a margin squeeze abuse can be realized

A margin squeeze abuse necessitates various fundamental accumulative circumstances to be achieved. These circumstances are as outlined in the current section and more detailed below. The initial condition remains is that the margin squeeze arises only in circumstances of vertical integration. [19] That is, if a firm principal in a marketplace for an upstream input provisions that input to compete functioning on a downstream marketplace, where the principal business also vigorous. All margin squeeze situations indulge downstream competitors and two markets where both are customers and rivals of the principal firm. [20] Second, to add on the business being principal upstream, the participation it provides to competitors should be “important” for rivals in the downstream marketplace. Some downstream rivals, for example, might rely on substitute skills, and therefore, will not come out reliant on the involvement value levied by the business. These rivalries will be at less at hazard from an endeavored margin squeeze. [21] Their survival has been interpreted taking into consideration the probable effect of a theoretical margin squeeze. Therefore, if the contribution is less important, for instance, if it is pointless or if there exist substitutes, it cannot be counted as the issue of a squeeze, since competitors are not interested in buying it at the principal company’s value or completely.

[22] Third, a margin squeeze undertakes that the contribution supplied by the principal business comprises relatively elevated, fixed quantities of the downstream value. If it signifies a little proportion of the entire cost or if it is utilized in mutable proportions by various downstream rivalries, there can be Spartan practical difficulties deducing that downstream competitors. The ostensible lack of viability was due to the dominant business’ input valuing. The fourth circumstances and the most essential condition regard the identification or accusation of the margin squeeze abuse. Particularly, what a legal quiz must be pragmatic to evaluate whether the principal business upstream value, downstream value, or the amalgamation of both values, lead activities of a downstream competition to be uneconomical; that is, either unprofitable or inadequate to offer a reasonable benefit. The most commonly-applied quiz is whether the principal business downstream functions can trade beneficially on the foundation wholesale price levied to the third party for the important input. [23] The Access Notice of Commission’s telecommunications also suggests that a second quiz: the margin at which a reasonably efficient service provider obtains a normal profit. Several other analysts suggested that additional test must be applied in order to total to a test grounded on the principal business’s value: the downstream rivalry actual costs. All these  quizzes seek to contend with the criteria of efficiency predicted of rivals before the involvement under rivalry law could be justified.

[24] Fifth, it requires being determined whether there exists an explanation or a justification for the principal business’s downstream fatalities other than an exclusionary object or intent. [25]There are several genuine motives why a business can set prices beneath its costs over a time. Market circumstances may be provisionally not good though expected to upgrade; the business might be setting truncated prices as a transitory marketing tool. It might have established new products and presently have little quantities, but expects quantities to raise; a rival might be charging untenable prices though will doubtless leave the marketplace or reread its policies; the marketplace might be in failure, but several market contributors are predictable to occur; the business might have committed an error and come in the marketplace on excessive large gauge; it might be incompetent, but trusts that it might improve its products or its performance, etc.

Finally, even though the above highlighted conditions are achieved, and it remains theoretically possible to recognize a margin squeeze constructed on the most appropriate accusation quiz, it would necessitate to be deliberated if the principal business’ behavior is likely to have or has had a material effect on antagonism. [26] It debatably needs consideration of various different matters. First, the margin squeeze must be tenacious, in that, it is long lasting enough for the principal business’ pricing to have a non-transitory effect on the downstream competitors. Second, it must be determined whether the demeanor at question is likely to root material injury to downstream competitors. Finaly, it must be determined whether the damage to competitors also causes to injure clients in the shape of the reduced choice or higher prices. To what degree it is important to indicate material negative impact on struggle is a field of disagreement in the decisional exercise and case law.

1.6 The Definition and Characteristics of Margin-Squeeze Abuse

In a controlled industry, operators grant access to important facilities. However, the amenities could be given at monopolistic tariffs or tariffs at which it could be hard for the rivals to appreciate a profit. In the theory, the description and notion of a margin squeeze is very simple. It refers to the circumstances where a vertically integrated a leadering firm utilizes its regulator over a contribution provided to downstream competitors to hinder them from realizing benefits in a downstream marketplace in which the a leadering firm is vigorous. If the vertically integrated mechanist of the telecommunications services and networks has a a leadering location in a particular marketplace, he / she may hinder marketplace access, and thus, misrepresent rivalry by operating a margin-squeeze kind of abuse.

A margin squeeze grew as a means of eliminating rivalries from the marketplace after the telecommunications areas were slackened all around the world. It can be achieved using various means. The occupant can increase wholesale values to such a degree that the margin between it and the retail prices could be negligible or negative. [27] In substitute, the current operator could reduce its values in the retail marketplace, while it achieves entire profit because of its wholesale fee. It can as well carry out these steps concurrently.

[28]The European Commission holds this description of the margin squeeze or price squeeze. A price squeeze can be established by indicating that the a leadering firm’s own downstream function cannot trade beneficially on the foundation of upstream prices levied to its rivalries by the upstream functioning arm of the a leadering firms. [29] In most appropriate situations, a price squeeze can also be established by indicating that, the margin among the price levied to rivalries in downstream marketplace including the a leadering company’s downstream functions, if any for the access and the prices which networks operator costs in the downstream marketplace is inadequate to permit a reasonably competent services provider in downstream marketplace to acquire a standard profit unless the a leadering firm can indicate that, its downstream process is remarkably efficient. Essentially, we see that the Commission rests down two tests to assess a price squeeze. It can be presented by likening the retail and wholesale prices in the downstream and upstream markets respectively, and observing whether the officer’s own downstream apprehension can function competitively with the same margin. Otherwise, it can also be determined as whether a rationally proficient provider emphasis supplied can obtain a standard benefits.

1.7 Incentives for dominant telecommunication operators to engage in a margin squeeze

[30]One of the issues that have not received adequate attention in the decision exercise and case law stresses is the principal business’s incentives to be involved in the margin squeeze abuse. An unusual characteristic of a margin squeeze is that the downstream competitors are still the customers of the a leadering business upstream. Consequently, by eliminating a downstream competitor, the a leadering business also lowers its upstream benefits since it would lose customers. This self-motivated principle can have considerable impacts concerning the enticements for such behavior and might, in fact, quantify a deterrent to involve in a margin squeeze at the initial place. Whilst the reduced inducement for a a leadering business to involve in a margin squeeze does not necessarily mean that such abuses always are irrational. They must, at least, force struggle courts and authorities to investigate whether a margin squeeze plan is reasonable in its correct market scenery.

Whether the a leadering business has got any lucid incentive to involve in a margin squeeze is mainly an experimental issue. The fundamental query is whether the loss in petition for the a leadering business’s merchandise upstream is offset by the supplementary quantities downstream. [31] The answer remains that, generally, the advanced the upstream margin comparative to downstream benefits, the superior the deterrent to involve in the margin squeeze in contradiction downstream competitors. Much has to depend, therefore, on the bordering effectiveness of the downstream and upstream markets. If the upstream marketplace is more lucrative comparative to the downstream marketplace, the motivation to eliminate downstream competitors is minimal. [32] The degree to which the a leadering business can preference up clients misplaced by the departing business; if competitors who endure in the downstream marketplace can also seizure them, there is little inducement to discount. The downstream competitors offer homogenous and distinguished products; if they provide discerned merchandise, the a leadering business’s enticement to discount them is less. The competitors are more effectual downstream rivals than the a leadering business; if there are there, it might be more competent for the a leadering business to discontinue its downstream firms and sell the upstream merchandise to such companies, etc.

One additional query important to the matter of inducement to involve in a margin squeeze is the impact of the risk of regulation to vigorously endorse effective rivalry on such inducements. [33] Even though a a leadering business has a solely from the viewpoint of the possibility of submission of the rivalry laws, an inducement to involve in a margin squeeze, the likelihood for a regulatory influence, pertaining regulatory authorities, to execute possibly wide fluctuating new obligations on the a leadering business vis-à-vis third socials can still perform as an important deterrent.

2.1 The correlation between excessive price, “pure” predation, margin, and cross-subsidies

Squeeze

[34]A margin squeeze concerns when the a leadering business firm arrays an excessive upstream value, a predatory downstream value, or an integration of both. Given that, excessive valuing, predatory valuing, and cross grants may establish different desecrations as defined in the national law analogues and Article 82 EC. It is essential to know to what degree, if any, these notions can be importantly utilized to assist in the determination of a margin squeeze abuse. [35] In transitory, while we agree that there exist particular parallels among these margin squeezes and abuses, there also exists adequate variation to propose that utilizing these labels in the setting of a margin squeeze is expected to clue to misunderstanding.

2.2 Excessive pricing and margin squeeze

[36]Prices have already been set importantly and obstinately above the modest heights as a consequence of the workout of marketplace power, which may be considered as excessive under equivalent national laws and Article 82 EC. Practically, excessive pricing proved a disreputably hard abuse to impeach, because of the problems in manipulating the Commission’s publicly and fair price stated unwillingness to perform as a price regulatory authority. None of the single test has been permitted by the Society institutions to measure when a value is excessive. However, four conceivable tests have been strategized:

(1) Cost comparison/ a price;

(2) The comparison of prices in a dominant firm and modest markets’ price;

(3) The value of economic product facility; and

(4) A price determination concerning numerous geographic fields.

[37] Extreme pricing abuses vary from margin squeeze abuses in numerous aspects. First, the normative content and their legal basis are dissimilar. Excessive value is an exploitative abuse between the connotations of Article 82(a) EC. Whereas a margin squeeze is an exclusionary abuse between the senses of Article 82(b) EC. Second, the domination legal quiz for recognizing an extreme price under the Article 82 EC is a variant to those for classifying margin squeeze abuse. In determining an unfair extreme price, the common standard is the company’s costs of providing the important service or product as compared to the same products and services in the similar market or even other associated markets. [38] In a margin squeeze case, prices are not excessive in association to the a leadering business costs; however, in association to the important profit margin and price concerning a downstream marketplace. In different meaning, an abusive price is unmannerly since its association to the important costs of providing one product, while an exclusionary border squeeze is fretful with the surplus of the price comparative to prices in other associated marketplace. Finally, it is quite possible that an upstream price, which is not abusive among the connotation, could, however, give increase to a border squeeze abuse. The opposite is also true. An upstream value that is abusive among the connotation might not give increase to a margin squeeze abuse. In brief, if an upstream value is concerned as excessive and unfair, simply because of its exclusionary impact in the downstream marketplace, the examination does not appear to increase anything important. [39] Certainly, conveying an upstream value that stretches to border squeeze abuse excessive is most likely to lead to unnecessary misperception among exclusionary and exploitative abuses. It has to be highlighted that, in any occurrence, extreme contribution prices are improbable in the networks companies where prices are classically regulated.

2.3 Predatory valuing “pure”, margin squeeze

The fundamental circumstance for a border squeeze is quite same to a pure predation instance in several aspects. That is, predation in the framework concerns the highest legal value, and is complete different from the likely standards for the lowest non-exclusionary degree alongside benefits that are proved to be important for this thesis.

2.3.1 Single product alongside horizontal competitors

To start with, where the kind of border squeeze supposed that, the downstream value is excessively low comparative to the upstream value. It is parallel to destructive valuing. Of course, there exist other kinds of a border squeeze, for instance, when the upstream value is quite high compared to the downstream value, which settles that, predation and border squeeze are no more important. [40] To add on this, there is a need that a business that has marketplace ability to sufficiently engage in fruitful barring. In addition, both necessitates contemplation of whether the behavior at question is commercially lucid and is only lucid due to its ability to eliminate competitors. [41] Finally, all need the behavior in issue to likely have an exclusionary impact on rivals; in specific, if there are the rivals, it would permit beneficial misuse of marketplace power in the coming future.

[42]At the same notion, there exist an important variation among a pure predation and a margin squeeze case. Initially, in the predation case, the struggle power considers the important value of the a leadering firm. In a border squeeze case, it considers solitary at the value in the downstream marketplace, which includes the upstream value considering it as an assumed in the downstream marketplace unless there exist a real discernment.

Secondly, in a border squeeze case, the a leadering firm is not importantly losing cash overall; although, it might do. It may be just taking its benefit upstream somewhat than downstream. The fire involved in a border squeeze can turn out to be beneficial on an end-to-end; that is, integrated basis all through the time of exploitation. [43] It then follows that, in a border squeeze situation, the issue of future recoupment does not importantly ascend as it usually does in the cases of predation. More exactly, the fact that, in a border squeeze situation, if the a leadering business remains profitable, upstream makes recoupment less or more simultaneous. In the cases of pure predation, the recoupment and loss making phases essentially comprise two varying periods. Thirdly, the inducement to involve in exclusionary conduct varies as among the predation and margin squeeze cases. In cases of predation, there is often no requirement of considering whether the unproven marauder can get profit from positively eliminating competitors. It will always be to certain degree. [44] In dissimilarity, in a border squeeze situation, a vertically assimilated firm’s incentives to eliminate competitors from a downstream marketplace are considerably lowered because the challenger will also turn to be an upstream client. A vertically integrated a leadering firm may lose extra by exhausting upstream clients than it would benefit as a consequence of their departure from downstream marketplace. [45] Therefore, if one should involve in analytical quiz for a border squeeze, an examination of whether the marketplace situation is such that, any disappointment to permit a value–cost quiz is more probable to be the consequence of a temporary and reasonable business plan than a thoughtful attempt to eliminate. In addition, a margin squeeze is not essentially profitable to consumers, though a predatory value does, at the minimal in the temporally. In the case of pure predation, the a leadering firm is purposely sacrificing temporally benefits, for temporally exclusionary causes. In the case of a margin squeeze, it is not important sacrificing temporally benefits, though in exercise, the value, which is more effective at eliminating competitors, will be downstream values that does not exploit temporally run benefits, in the case where consumers benefit. [46]Finally, the possibility of the accessible resolutions may vary as among the cases of pure predation and margin squeeze. In the case of pure predation, the resolution is to raise the loss-making value. In the case of a margin squeeze, the a leadering business would be necessitating to drop the contribution value, raise the price of retail, or adjust slightly, either downwards or upwards, retail prices and/or the upstream.

2.3.3 Cross subsidies and margin squeeze

[47]A cross grant happens when the company utilizes funds gotten from one field of exercise to fund exercises in other area. Multiproduct firms cross-subsidize all the period. Several regulatory matters are increased by cross-grants, specifically in the setting of values and regulated marketplaces. This includes the requirement for accounting and structural separation among reserved competitive and monopoly businesses. [48] Questions regarding how firms finance, specifically exercises are however, immaterial under rivalry law: the impacts of an exploitative exercise are most likely to be similar whether the consequential fatalities are continued by cash flow originating from other activities within. The European Countries rivalry law levies several important supplemental hindrances on the reserved monopolies that might be important to the possibility for cross-grants. Initially, in the effort of avoiding cataloging as illegal State aid, administration grants for the social service duties should satisfy numerous cumulative circumstances:

(1) The public facilities accountability should be distinct clearly;

(2) The grant recipient should actually be necessitated to release public service duties; the limits on the foundation of which the reimbursement is remunerated have been reinforced before and in a transparent and objective manner; and

(3)The payment does not go beyond what is important to cover the entire or some part of the value utilized in clearing the public service duties, considering the justification of the importance of a reasonable profit and receipts for clearing those duties.

[49]Second, a State of monopoly could not use cash derived from exploitative conduct in association with the protected monopoly to give cash to the attainment of a job that is active in the market that is open to rivalry. Similar companies which might lie in wholly unconnected marketplace or from other sources like the capital marketplace or even financial reserves. Furthermore, in most instances, there cannot be a handover of cash; though, there is cross-subsidization through the planned distribution of cash. The only omission concerns predatory valuing. It is evident that there is a fundamental association between losses on the profit and market on the other. It might be most appropriate to get an exploitation of predatory valuing. The abuse is predatory valuing, but the main source of getting cash for the fatalities is the cross-grant from the beneficial markets. It forms the situation that is found in the case of Deutsche Post.

It is hard to observe what the cross-subsidy examination can add to the practical review for border squeeze exploitation. Obviously, there are cases where the main source of acquiring cash for the downstream losses is a beneficial upstream; a leadering marketplace, however, the rivalry-law impacts of behavior are more likely to be similar whether the cash concerned originates from the upstream marketplace, other wholly unassociated marketplace, or from cash marketplace sources. smearing a cross-grant examination can therefore, have the impacts of requiring a rivalry power or accuser to indicate that, the main origin of the cash to provide the downstream fatalities is the beneficial upstream marketplace that is, the causal connection. In addition, having satisfied all the other circumstances for a border squeeze, such an examiner would have the profits of requiring exactness in the recognition of the methodology in which the margin squeeze can be conducted, which can be desirable.

2.4 Margin squeeze under sector-specific regulation

The impact of ex-ante region-specific regulation regarding the possibility for a margin squeeze leads to abusing the ex-post sector-specific regulation and can be used as preventive measures or even redress the margin squeezes. However, a margin squeeze is usually an index of the matters that can come out in the background of vertical association. [50] A condition creating marketplace failures that, regulation contains long wanted to address. This comes out to have the deductions reached. Tetra Pak was proved to have dedicated a variety of valuing and other exploitation in two varying but associated marketplaces, non-aseptic and aseptic cartons and machinery. Market shares in non-aseptic and aseptic marketplaces were approximated to be 90% & 50% respectively. There were important incorporations associations among the two marketplaces. The case of the commission’s was that they had been involved in predatory valuing in association to its on-aseptic and aseptic carton by valuing below standard total value. [51]This finding presumed that, the company was able to suffer losses in the areas of non-aseptic sector by the substantial benefits created in the domination aseptic field. Tetra Pak based this argument that, before the Community Courts had not involved in cross-financing from the non-aseptic and aseptic areas. The Court at the first instance did not engage in rule on this perspective, but noted that, the application of treaties does not rely on proof that, there was cross-financing among two sectors. In another words, the main source of funding for the deficit was irrelevant if the circumstances for predatory valuing were satisfied.

[52] Difficulties with vertical association when downstream marketplaces have been started into competition are that it forms incentives for officers to dominate beside downstream rivals. Such dominations can take the means of snub to give access to excessive value for similar inputs, important inputs, or a margin squeeze. Regulators have strategized numerous ways to cope with problems linked with the vertical association. One such a plan consists of an extent of separation among the collegial upstream and competitive downstream activities of the obligatory. In this field of telecommunications, such a difference has been practically incomplete to accounting disintegration, mutual with value allocation regulations.

[53] In theory, it is only a full parting of the retail and wholesale exercise that is done through creation of two different firms with different ownership that could wholly remove the incumbent’s inducement to discriminate the beside downstream competitors. In practical, however, this answer only has sense when the value of the contribution offered by the obligation represents an important share of downstream mechanists entirely costs. Furthermore, vertical parting might have important difficulties like, the increased transaction costs, the risk of double marginalization, and the loss of frugalities of scope.

To add on this, users might also have priorities for a vertically associated one-stop-shop assembly of their requirement. Because of the inexact profits of vertical parting, regulators have eschewed such policies for relying on value control devices that are designed to hinder the exclusionary value. Following the admission into power of the liberalization orders that is assumed by the Community institutions, NRAs contain keen substantial resources and energy to the description of the interconnection government, as well as valuing commands for unbundled network rudiments.

[54] The amplification of such regime commands has been contentious and difficult as NRAs aim to balance opposing welfares, inspiring admission of new contestants, while upholding the appointees’ incentives to endow. Firstly, NRAs indicated a little interest in a margin squeeze matters, leaving the problem to be handled by rivalry powers, with the exclusion of NRAs with equivalent dominion to apply rivalry rules (e.g., Ofcom). For instance, contracts that can easily be decided within one entity may become tougher, and therefore, it is more costly among vertically unglued entities on the effect of business, on the ideal size of the business.

Once the vertically unglued bob functioning in the probably competitive section keeps substantial marketplace powers, vertical separation may end up into double marginalization. [55]This is whereby monopolistic benefits are mined from both sections of the marketplace, thus subsequently in prices in the downstream marketplace, which are from additional the social ideal than it could be the situation if one vertically incorporated monopolistic business functioning on both sections.

Recently, a margin squeeze has proved to be a main regulatory matter. At the EC height, the essential of preventing occupants from involving in margin squeeze plans was highlighted by the Commission in the concert of its suggestion for the Council Regulation and the European Parliament on unbundled admission to the native loop assumed in 2000, which was stipulated:

[56]Pricing and Costing rules for native loops and associated amenities such as leased transmission and collocation capacity should be a nondiscriminatory objective to make sure fairness and transparent. Pricing rules must ensure that the local entwine provider is capable of covering its most appropriate costs in this respect and a reasonable benefit. Pricing regulations for local loops must foster sustainable and fair competition and make sure that there is no alteration of competition, in specific, there is no margin squeeze among prices of retail and wholesale activities of the notified worker. In this respect, it is considered essential that competition powers are referred to. This information, which is now available in the 10th recital of Regulation No 2887/2000 concerning unregulated entry to the native loop, appears to impulse NRAs to make sure that, a margin squeezes can be avoided when it sets the prices of thee unbundled networks elements. Likewise, Directive 2002/19 on entry to, and inter association of, electronic communications network and linked amenities facilities directly denotes the importance of preventing a margin squeeze by exercising ex-ante interface. Particularly, Recital 20 denotes: “Price regulation may be important when market assessment in a specific market discloses inefficient rivalry.” [57] The regulatory interference might be relatively nimble, such as the obligation that prices for transporter assortment are sensible as set in Directive 97/33/EC. Much heavier, such kind of an obligation that, values are cost based to offer full explanation for those values where rivalry is not sincerely energetic to hinder excessive valuing. In specific, operators with the important market authorities must prevent a price squeeze. [58]This is where the difference among their retail values and the interconnection values charged to contestants who offers same retail facilities is not enough to make sure there is a bearable competition. Furthermore, Article 13, which deals with controls of prices and cost accounting duties, provides that:

A national control authority might in agreement with the necessities to Article 8, exact duties associated to price controls and cost recovery, including duties for cost based of obligations and prices concerning cost secretarial systems, for the establishment of specific kinds of access and/or interconnection, in circumstances where the market assessment shows that, an absence of active rivalry means that, the mechanist concerned may sustain values at an exploitative high heights, or relate price squeeze to the impairment of end-users. [59]Price regulation on wholesale facilities can be enacted, inter alia, as the NRA have fear that, because of the inadequacy of effective rivalry on such facilities, the occupants may be in a location to pertain the margin squeeze. The instructions, however, verdures the NRAs open to choose the pricing devices to be utilized to hinder margin squeezes  to occur.

2.5 Effects of price control device on a margin squeeze

[60]In the telecommunications field, retail and/or wholesale markets might be the main theme to value control. While wholesale price regulation importantly looks forward to hindering exclusionary exploitation by the occupants, retail price regulation looks forward to hindering exploitative or, in other situations, making sure there is a wide obtainability of the facility in issue. The following area assesses how the numerous price regulation mechanisms can impact the capability and/or the inducement of vertically incorporated mechanist to be involved in a margin squeeze. In this respect, an essential distinction must be made conditional on the possibility of control of the occupants’ prices.

2.5.1 Retail and wholesale markets regulated

In this case, a margin squeeze must, in theory, never occur because prices are not set by the occupants, but by the controller. [61] This does not necessarily guarantee that the incentives /risks of a margin squeeze or of exclusionary exploitative are entirely absent.

First, there can still exist a regulatory margin squeeze, which could arise when entry charges are cost-oriented and the retail amounts are cost-oriented or below-cost; that is there are unbalanced tariffs. When retail amounts are set beneath cost, for example, to make sure entry to low income customers or households located in high cost sections, no access is, therefore, conceivable. This kind of a margin squeeze cannot arise from the charging exercise of the occupant, but could be insincerely created by the controller.

[62] Second, the occupant might decide to establish retail charges beneath the level established by the controller pretentiously if it is legal to do this. There may be a good reason for doing this, that is, to rejoin to vigorously charges cuts by a new entrant. Below-cost charging might also be executed with a destructive intent. The advanced plan would be perilous as the controller will have important information on the occupant’s cost configuration.

Third, a margin squeeze would also be experienced when retail charges are regulated by a price-cap that conceals  a basket of facilities. [63] In such situations, the occupants could price vigorously service, henceforth lowering or even removing the border of its rivalry for the anticipation of these facilities, but still continuing acquiescence with the complete price cap.

Fourth, the margin squeeze can as well befall when the retail and wholesale markets are regulated through a universal price cap, which is a universal cap on prices basket comprising together the price of the prices and interconnection of end-users facilities in the downstream marketplace. [64] With this charges regulatory plan, the occupants would, for instance, decide to establish quite high interconnection taxes and quite low end-user charges in a way that would nevertheless remain reliable with the universal cap in the effort to push its rivals out of markets. Such taxes edifice would be unfavorable to the a leaders, but it may still accept this plan if it trusts that, its greater financial possessions would permit it to outlive its competitors and that the losses it is likely to make under this price structure will convince the controllers to reduce the cap at the future price revision.

[65] Finally, when a leaders cannot accept exclusionary charges, they can rely on the non-price instrument to drive rivals away from the market. A  a leader might look forward to raising competitors’ costs by humiliating the eminence of interconnection, therefore raising the orders processing time.

2.5.2 Retail markets uncontrolled and wholesale market regulated

In this case, a leader can margin squeeze their rivals on downstream business by reducing its retail charges. [66]This charges plan can be enabled by cross-subsidization among the retail and wholesale markets, either by transfer of cash or by misallocation of mutual costs. This deader plan may be inhibited by accounting parting and charges-allocation regulations. In substitute, a a leader could provide its retail subordinate reduced interconnection charges than its rivals. This would disturb the nondiscrimination duties that it is enabled on a leader by the section-specific rules or inattentive duties. Of course, there might be lawful reasons as to why a leader can provide reduced prices to its downstream functions. Vertical association might provide a leader to realize frugalities of scope and scale, which might interpret in the reduced delivery of costs to its associated downstream functions.

2.5.3 Retail markets controlled and wholesale markets uncontrolled

This case is unlikely to be experienced. Certainly, the nonappearance of price regulation on the wholesale markets suggests that this marketplace is competitive because of the presence of numerous access earners. Rivalry at the upstream height should usually trigger rivalry at the downstream height, if only new applicants are not handicapped due to the lack of opposition, and the hazard of anticompetitive plans. [67]This absence of competition involves at the upstream height. A leader may be looking forward to eliminating rivals on the retail markets by reducing its prices; however, so long as it residues foremost, these charges should, in dogma, remain higher than other costs in the effort of avoiding a violation.

2.5.4 Retail and wholesale markets uncontrolled

Margin squeeze plans are likely to increase in this case. The absence of rules like plans fails to be handled to lower the rivalry regulations. [68]The above explanation ensures that, clear scope of charges rules can importantly impact the capability of  leaders to involve in the margin squeeze. Generally, the higher the pricing suppleness offered to a leader is, the more there is likelihood it has a margin squeeze have to occur. To add on the determination, the scope of rules that is, control of downstream and/or upstream prices, controllers should also select a particular charging methodology. These procedures can have substantial impacts on the incentives and capability of  leaders to involve in a margin squeeze.

As much as the wholesale entry is apprehensive, telecommunications managers have relied on two major methodologies; that are; LRIC and retail-minus:

2.5.4.1 LRIC.

The classical Long-Run Average Incremental Cost (LRIC) takes into consideration the increased costs experienced in the extensive run, which are related causally to the establishment of entry, and which could be established by a leader utilizing the most proficient recent technology to offer such entry. Additionally, the LRIC endorses rivalry by new participants in the downstream markets because it does not recompense a leader for the benefits it may get in offering interconnection. Furthermore, a leader is not remunerated for the charges it incurs, however, for the charges reinforced by a proficient operator. Alternatively, under the LRIC, the  leader gets no refund for the benefits that it may mislay if new participants use its amenities to get lost of the customers and, in most situations, may be forced to provide entry below its charges, it will experience high inducements to involve in exclusionary behavior to direct downstream rivals out of marketplaces. Thus, the hazards of the margin squeeze exploitation are hypothetically essential under the LRIC.

2.5.4.2 Retail minus

Under the retail-minus perspective, the entry price is equilibrium to the prices at which a leader would trade a facility to a specific customer in the downstream marketplaces subtracted the charges which it evades when the new occupants shoulders most of the costs of offering this facilities to the customer. One main advantage of the retail-minus is factual that, since wholesale prices is associated to the retails prices, the  leader must, in theory, mislay the capability to execute the prices of wholesale, which are inferior or even equivalent to the retail price. Other advantage is that it only accepts proficient access in order for them to be refutable.[69] A leader rivals will require having inferior costs than a leader evaded costs like billing. The last advantage of the perspective is that it allows  leaders to uphold substantial, all or even some part of the downstream benefits, which will lower the inducement for exclusionary plans. [70] The difficulty with this perspective is that, with no retail price guideline, it does not introduce down exploitative wholesale price to a cost based level. Because the price of the wholesale is premeditated as the price of the retail minus the charge of the a leader, an exploitative retail prices will routinely convert into an exploitative price of wholesale.

In the dainty of the sacrificing, it is seemingly that there is no one ideal methodology of pricing for inspiring downstream rivalry. Each has its own disadvantages and advantages.  However, the LRIC has got strong competitive characteristics, because it is unfavorable to   domineering. This can also lead incumbents’ inducement to involve in exclusionary plans like margin squeeze. However, the retail minus has imperfect competitive characteristics because it makes it hard for the new participants to challenge  leaders. All the same, it has got the advantage in that it considerably lowers the  domineering inducement to involve in the exclusionary plans. From the objective of hindering margin squeeze, retail minus is, therefore, the most preferable pricing method. It has contemporary been inveterate in the ERG usual location on solutions and in the perspective taken by the specific NRAs.

[71]Retail price regulation methodologies can as well affect the capability/incentives of  leaders to involve in margin squeeze. Since a margin squeeze happens not only once,  a leader raises its prices, but as well, when it decreases its retail charges or both. Controllers have the choice among two methods to prearrange retail prices: rate-of-return control and the price cap. The assumption is that, for present issues that controls retail prices signify a maximum, and not a minimum, that is, the  leader is never allowed to fix a price, which is higher than the controlled price; though, it is right to fix a price, which is lower the controlled price.

2.5.4.3 Rate-of-return control

One means of calculating the retail price is by relying on degree the rate-of-return control. The rate-of-return control permits the controlled business to alter prices that cover its functioning costs and fix a pre-determined reappearance on the cash dedicated to its functions. [72]Rate-of-return valuing is, therefore, a cost-founded methodology of locating prices. In practical, the costs that are unambiguously allocated to a specific facility are encompassed in the prices that costs and service are usual to various services that are granted with regard to some principles of accounting to those facilities. [73] Once cost is no longer enclosed by the controlled price, the business can question for an assessment to evaluate a new collection of prices. The rate-of-return constrains the capability and lowers the inducement of a leader to accept prices beneath the controlled price as one part and parcel of margin squeeze plan. In the effort of adopting a price beneath the controlled price, a leader must lower the price or its costs beneath costs. The first available option can be unattractive as it could result in to the locating a reduced control price by the controllers in its following pricing revision. The second available option can be dangerous as controllers depend on the rate-of-return control, basically they have explained information on  leaders retail cost assembly. Predatory valuing can be easily noticed.

2.5.4.4 Price caps

Instead of controlling the return in that the controlled business is permitted to conduct on its investment, controllers may execute caps on  leaders’ prices. [74]Price caps control has increasingly become the favored methods of controlling as it offers a leader a strong inducement to lower the costs in the fixed prices periods. An essential characteristic of a price cap when concerning to determining the effect of this plan on the incentives/ ability of the a leaders to involve in a margin squeeze is that, this cap is usually executed upon bags of prices, that is, it is the weighted standard of this price which does not surpass the caps. [75]The flexibility established by the dependence on bags of prices offers a leader to price vigorously in various retail markets where the competition is stiff by striking, for example, the increased prices in the others where competition is considerably lower. A  leader facing hard opposition on the long-distance facilities, and no opposition on the local services could, therefore, be desirous to lower its prices of the initial markets and to raise the prices of the later markets, supposing that, local services and long-distance services belong to similar price baskets.

Conclusion

In conclusion, we can deduce that a margin squeeze is a complicated matter in practice. In spite of the substantial courtesy it has been given in recent times from the NRAs, the NCAs, and Commissions, various subjects remain unsettled. There exists discrepancy, for instance, on the kind of accusation test that must be dependent upon when determining margin squeeze abuses and when taking calculation of the fundamental costs to be comprised in the test. Likewise, recognizing margin squeeze abuses in the new and upcoming market characteristics of a range are of logical questions that have not yet been adequately adapted today. Another stratum of intricacy is made by the simultaneous application of opposition sector-specific and rules application, which raises risk of substantive and jurisdictional conflicts. [76]While devices have been manipulated to lower such risks, there exist still cases in whose behavior is questionable to the concurrent solicitation of zones specific for the competition law and control. This simultaneous application of various sets of regulations makes an important risk for  leaders, in specific given the deviation in standards and rules between the NCAs and NRAs.

[77]The utmost risk, however, ascends not from technical or substantive conflicts, but from battles between regulatory objectives and competition law principles. The competition law looks forward to endorsing economic productivity by defensing a competitive marketplace structure. Control differs in that it looks forwards to smoothening market inadequacies over a period of time, including where most appropriate by making new precise obligations that cannot be executed under the rivalry law. [78] The competition law could not and should not be utilized to attain regulatory aims, such as helping the access of extra mechanists in the marketplace through favorable pricing devices, even if the opposition powers of the NRAs trust that, in doing this, struggle would be improved in the end. The danger of controlling through the competition law is specifically severe when sector-specific controllers have simultaneous authorities to apply rivalry regulations to the areas that they are charged with controlling. [79]However, competition powers acting in the newly liberalized market also assume from period to period that, their obligation is to protect struggles and not at all competitors. The leaders can be necessitated under the competition to help their challengers entirely exceptional situations and they do not have duty to refund competitors for any kind of advantages that might be bellow unless they are the cause of them. In order to hold alternative risks endorsing the indeterminate benefits of temporally inefficient access over the current inevitability tha, clients are best aided by the competition strategies that only defend rivalry on the virtues.

 

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[2] P. Crocioni and C Veljanovski, Price Squeeze, Forclosure and Competition Law, Principles and Guidelines, Journal of Network Industries, , 4 /1, (2003),  39.

[3] European Commission, Notice on the application of the competition rules to access agreements in the telecommunications sector, OJ 1998, C 265/2.

[4] Nicolas Petit, ‘The National Regulatory Authorities’, GCLC Working Paper Series, 02/04

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[6] W. Briglauer, G. Götz, & A. Schwarz, ‘Can a Margin Squeeze Indicate the Need for Deregulation? The Case of Fixed Network Voice Telephony Markets’, Telecommunications Policy, 34/10, (2010), 551-561.

[7] P. Alexiadis, & M. Cave, Regulation and Competition Law in Telecommunications and other Network Industr, In R. Baldwin, M. Cave, and M. Lodge (eds), The Oxford Handbook of Regulation (Oxford; New York: Oxford University Press, 2010).

[8] ERG, ‘Revised ERG Common Position on the approach to appropriate remedies in the ECNS regulatory framework’. ERG (06) 33. 2006

[9] A. Heimler, Margin Squeeze: Regulatory Violation or Antitrust ? Journal of Competition Law and Economics, 6/4, (2010), pp 879-890.

[10] Nicolas Petit, ‘The National Regulatory Authorities’, GCLC Working Paper Series, 02/04

OECD, 2010, The Margin Squeeze. Paris: OECD Policy 106, DAF/COMP 36. 2005

[11] ERG, Revised ERG Common Position on the approach to Appropriate remedies in the ECNS regulatory framework. ERG (06) 33. 2006

[12] Bundesnetzagentur, Notes on margin squeezes as defined by section 28(3) para 2 TKG, 14 November 2007.

[13] European Commission, Notice on the application of the competition rules to access agreements in the telecommunications sector, OJ 1998, C 265/2.

[14] P. Crocioni, and C. Veljanovski, Price Squeeze, Forclosure and Competition Law, Principles and Guidelines, Journal of Network Industries, 4/ 1, (2003). 39.

[15] P. Colomo, On the Application of Competition Law as Regulation: Elements for a Theory, Yearbook of European Law, 29(1), 261-306. Commission’s Practice in the DSL Market, Journal of Competition Law and Economics, (2007), pp. 3.

[16] G. Monti, Managing the Intersection of Utilities Regulation and EC Competition Law, Competition Law Review, 4/2, (2008), pp. 124-145.

[17] European Commission, Notice on the application of the competition rules to access agreements in the telecommunications sector, OJ 1998, C 265/2.

[18] G. Faella, & R. Pardolesi, Squeezing the Price Squeeze: The Antitrust Law, EC Journal of Competition Law and Economics, 6/1, (2010),. 255-284.

[19] European Commission, Antitrust: Commission decision against Telefónica frequently asked questions, MEMO/07/274, 4 July, 2007.

[20] D. Geradin, & R., O’donoghue, Margin Squeeze Abuse in Telecommunications Sector, Journal of Competition Law and Economics, 1/2, 355-425.

[21] A. Heimler, Margin Squeeze: Regulatory Violation of Antitrust? Journal of Competition Law and Economics, 6/4, (2010), 879-890.

[22] European Commission, Commission Recommendations (NGA), OJ 2010, L 261/21.

[23] Bundesnetzagentur, ‘Notes on margin squeezes as defined by section’ 28(3) para 2 TKG, 14 November 2007.

[24] D. Geradin, Refusal to Supply and Margin Squeeze: A Discussion of Why the “Telefonica Exceptions” are Wrong. Tilburg: TILEC Discussion Paper 2011-009.

[25] P. Colomo, On the Application of Competition Law as Regulation: Elements for a Theory, Yearbook of European Law, 29/1,  261-306. Commission’s Practice in the DSL Market, Journal of Competition Law and Economics, (2007), 3,

[26] Bundesnetzagentur, Notes on margin squeezes as defined by section 28(3) para 2 TKG, 14 November 2007.

[27] European Commission, Notice on the application of the competition rules to access agreements in the telecommunications sector, OJ 1998, C 265/2.

[28] A. Heimler, Margin Squeeze: Regulatory Violation or Antitrust? Journal of Competition Law and Economics, 6/4, (2010),  879-890.

[29] European Commission, Competition: Commission helps to secure improved competitive conditions for line sharing in Germany, Press Release  IP/05/1033, 3 August 2005.

[30] European Commission, Commission Recommendations (NGA), OJ 2010, L 261/21.

[31] European Commission, Competition: Commission helps to secure improved competitive conditions for line sharing in Germany, Press Release IP/05/1033, 3 August 2005.

[32] D. Geradin, Refusal to Supply and Margin Squeeze: A Discussion of Why the “Telefonica Exceptions” are Wrong. Tilburg: TILEC Discussion Paper 2011-009.

[33] P. Crocioni, and C. Veljanovski, Price Squeeze, Forclosure and Competition Law, Principles and Guidelines, Journal of Network Industries, 4/1, (2010),  39.

[34] G. Faella, & R. Pardolesi, Squeezing the Price Squeeze: The Antitrust Law, EC Journal of Competition Law and Economics, 6/1, (2010),  255-284.

[35] ERG, ‘Revised ERG Common Position on the approach to Appropriate remedies in the ECNS regulatory framework’. 2006, ERG (06) 33.

[36] J. Bouckaerts, & F. Verboven , ‘Price Squeezes in a Regulatory Environment’, 2004 J

[37] Bundesnetzagentur, ‘Notes on margin squeezes as defined by section 28(3) para 2 TKG’, 14 November 2007.

[38] W. Briglauer,  G. Götz, & A. Schwarz, Can a Margin Squeeze Indicate the Need for Deregulation? The Case of Fixed Network Voice Telephony Markets, Telecommunications Policy, 34/10, (2010), 551-561.

[39] Bundesnetzagentur, ‘Notes on margin squeezes as defined by section 28(3) para 2 TKG’, 14 November 2007.

[40] G. Faella, & R. Pardolesi, ‘Squeezing the Price Squeeze: The Antitrust Law, EC’ Journal of Competition Law and Economics, 6/1, (2010), 255-284.

[41] A. Heimler, ‘Margin Squeeze: Regulatory Violation or Antitrust’?, Journal of Competition Law and Economics, 6/4, (2010), 879-890.

[42] S. King, & R. Maddock, Imputation rules and the regulation of anti-competitive behavior telecommunications (University of Melbourne. 1999).

[43] P. Larouche, Competition Law and Regulation in European Telecommunications (Oxford; Portland Oregon: Hart Publishing, 2000).

[44] ERG, ‘Revised ERG Common Position on the approach to Appropriate remedies in the ECNS regulatory framework’. 2006 ERG (06) 33.

[45] European Commission, Antitrust: Commission decision against Telefónica frequently asked questions, MEMO/07/274, 4 July 2007.

[46] J. Bouckaerts, & F. Verboven, ‘Price Squeezes in a Regulatory Environment’, J 2004.

[47] S. Bishop, & M. Walker, The Economics of EC Competition Law – Concepts, Application and Measurement, (2nd ed.), Sweet & Maxwell, 2002, 24.

[48] G. Edwards, ‘Margin squeezes’, European Competition Law Review, 32/8, (2011), 402-405.

[49] European Commission, Competition: Commission helps to secure improved competitive conditions for line sharing in Germany, Press Release IP/05/1033, 3 August 2005.

[50] G. Faella, & R. Pardolesi, ‘Squeezing the Price Squeeze: The Antitrust Law, EC’ Journal of Competition Law and Economics, 6/1, (2010), 255-284.

[51] P. Crocioni and C. Veljanovski, ‘Price Squeeze, Forclosure and Competition Law, Principles and Guidelines’, Journal of Network Industries, 4/ 1, (2010),  39.

[52] Antitrust Laws (ed.), Fordham Corporate Law Institute, 212-300.

[53] A. Heimler, Margin Squeeze: Regulatory Violation of Antitrust? Journal of Competition Law and Economics, 6/4, (2010), 879-890.

[54] B. Ferrari & P Siciliani, ‘Exclusionary Pricing and Consumers Harm: the European’ 2007.

[55] D. Geradin, & R. O’donoghue, ‘Margin Squeeze Abuse in Telecommunications Sector’, Journal of Competition Law and Economics, 1/2, (2005),  355-425.

[56] ERG, ‘Revised ERG Common Position on the approach to Appropriate remedies in the ECNS regulatory framework’. 2006 ERG (06) 33.

[57] J. Temple Lang, European Competition Policy and Regulation (Northampton: Edward Elgar).

[58] D. Geradin, Refusal to Supply and Margin Squeeze: A Discussion of Why the “Telefonica Exceptions” are Wrong. Tilburg: TILEC Discussion Paper 2011-009.

[59] G. Edwards, Margin squeezes, European Competition Law Review, 32/8, (2010), 402-405.

[60] S. Bishop, & M. Walker, The Economics of EC Competition Law – Concepts, Application and Measurement, (2nd ed.), Sweet & Maxwell, 2002, 24.

[61] W. Briglauer, G. Götz, & A. Schwarz, Can a Margin Squeeze Indicate the Need for Deregulation? The Case of Fixed Network Voice Telephony Markets, Telecommunications Policy, 34/10, (2010), 551-561.

[62] B. Ferrari, & P. Siciliani, ‘Exclusionary Pricing and Consumers Harm: the European’ 2007.

[63] Nicolas Petit, ‘The National Regulatory Authorities’, GCLC Working Paper Series, 2005 02/04

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[64] European Commission, 2009, Regulation on the Commission, OK 2008, C 45/06.16

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[66] P. Alexiadis, & M. Cave, Regulation and Competition Law in Telecommunications and other Network Industr”, In R. Baldwin, M. Cave and M. Lodge (eds), The Oxford Handbook of Regulation (Oxford; New York: Oxford University Press, 2010).

[67] European Commission, Competition: Commission helps to secure improved competitive conditions for line sharing in Germany, Press Release IP/05/1033, 3 August 2005.

[68] J. Bouckaerts, & F. Verboven, Price Squeezes in a Regulatory Environment, J, 2004.

[69] P. Alexiadis, & M. Cave, Regulation and Competition Law in Telecommunications and other Network Industr”, In R. Baldwin, M. Cave and M. Lodge (eds), The Oxford Handbook of Regulation. (Oxford; New York: Oxford University Press, 2010).

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How Romanian Government Can Drive Tourism towards Improvement of Economy

                                       Introduction

The Romanian government has been relentless in exploiting every available opportunity in order to improve its economic position and sustain its competitiveness in European business. While there have several cross-industrial capacity enhancement programs by the government, it appears that there is room for improvement in capturing some unique opportunities and resources (Draghici et al, 2010). Among the trends in the management of the industry by a majority of governments in the European Union is the integration of revenue earning sectors into the national economy through public and private sectors partnerships (Bailey and Richardson, 2010). According to the author, it has been identified that tourism has one of the largest global economy contribution at about six percent. It therefore means that business integration must be facilitated to tap into the huge potential that the industry has globally. To facilitate such economic integration, potential service sector giants such as tourism have been identified with regard to the relevant capacity that it has to the national economy. Tourism has evolved to be among the most stable industries whose future projections can be enhanced to facilitate quick economic recovery, especially at a time when the global economy is still experiencing the aftermath of the recent economic crisis. While the performance of the global economy seems to continually depend on service industry, especially in a large portion of Europe, it is certain that tourism is still underexploited.

National governments have not been taking the industry with the attention that it deserves. There are several ways that the government can make the much needed revolution input to enhance the benefits obtained from the industry. With a particular assessment of the Romanian tourism industry, possible government contributions will be explored in order to inject momentum into the sluggish economy. An extensive array of options and alternatives will be explored in order to maximise the benefits that the government can obtain from the tourism industry. Among the Scandinavian countries, tourism has a huge potential that can be used to increase the recovery capacity of the national economy. Romania has several tourism opportunities that can improve the entire country’s economy with the appropriate review of Sustainable Tourism Development Strategy (STDS), enhancement of the local tourism sector and creation of appropriate branding that will inject new momentum into the industry and economy (Beaumont and Dredge, 2009). The capacity of the relevant opportunities towards rejuvenation of the economy will be conducted to ensure that government policy in the industry captures the economic framework.

Research

Aim

The aim of the study is to provide the possible interventions that the Romanian government needs to introduce to the tourism industry in order to make significant economic contributions. The following research questions will be considered in the research.

Research Questions

What are the European conditions of the tourism industry likely to affect Romanian performance in the market?

What are the specific capacities in tourism that the government of Romania tap in order to improve economic benefits from tourism industry?

Are there threats and risks of the industry that can affect the performance of the Romanian national economy?

What insights can the Romanian government adopt from modern economic framework and tourism particularly management?

Objectives

To assess the potential alternatives that the Romanian government can explore in order to attract service industry benefits for the national economy.

To maximise local, regional and international tourism market exploitation through government policy approach.

To explore the capacity of Local Tourism Governance Approaches (LTGA) under the Romanian economic improvement context

Literature Review

Research will entail the assessment of the actual position of the Romanian government involvement in making contributions to the tourism industry. In terms of policy, government micro and macro economic policy framework that directly touches on the tourism industry in Romania will be analysed. This will facilitate in ascertaining the possibility of loopholes in the government policy contribution to the enhancement of the economy through the industry (Bailey and Richardson, 2010). Having identified the strength of the policy framework, the research will be able to draw inferences that can assist in comparison of the best practices in Europe and among other leading tourist destinations. According the applications of this approach, it will be established that certain policy measures facilitate direct economic contributions to the national economy while there is a possibility that negative impact can also be felt from policy interventions.  For instance, the policy framework level of involvement of the local communities in establishing a multi-sector partnership in promotion of tourism has a direct impact on the tourism industry. Establishing whether the government makes contributions to facilitate or discourage appropriate partnership will be performed on a cost benefit analysis. Recommendations will then be formulated t facilitate the appropriate reorganization of the economic policy framework that the Romanian government has.

Efficacy in economics has been incorporated into various industries in order to maximise and optimise operations and revenues obtained thereon.  In order to facilitate the appropriate context interpretation, the tourism industry will be assessed for its unique characteristics in order to engage economic assessment of policy framework. Property use issues that include natural resources and its regulation by the government will be assessed to ascertain restrictions emanating from the government policy on natural resources (Bailey and Richardson, 2010). According to the authors, it is also important that the level of government’s participation in infrastructure needs to be established. In light of this perspective, the research will also assess the level of government facilitation through support of infrastructure. Infrastructure in the tourism industry will involve various perspectives such as construction and legal policies that enhance the industry. Alternatively, it will be ascertained of the involvement of various governance approaches. According to Beaumont and Dredge (2009), it is important that the various levels of government facilitation for tourism are assessed. In this research, the amount of contribution from the government at various levels will be used to determine how the commitment from the governance aspects of the economy applies into the industry.

Regarding the assessment of the strategy applied by the government to improve tourism in the country so that it can make contributions into the economy, the strategies in use will be assessed. According to the study conducted by Cottrell and Cutumisu (2006), there is an important contribution made to the economy depending on the sustainability of the industry. Sustainability of the industry will be assessed from the comparison of the performances achieved from the region’s forecast. Depending on the capacity that the Scandinavian countries display regarding the tourism industry opportunity, inferences will be drawn from an analysis of the tourist attractions that Romania has. Sustainability assessment in terms of the capacity that possible optimization of the industry will make to the national economy will be used to make the necessary recommendation towards design and establishment of strategies to assist in economic recovery. Besides referring to the forecasts from the industry capacity, it will be necessary also to consider tourism resources management capacity. From the management capacity survey issues, a needs analysis will be performed to recommend managerial realignments to assist in creation of necessary links with the economy (Briedenhann 2011). Sustainability will also incorporate determination of the community involvement capacity into the management of the tourism recourses. These elements of industry sustainability will be used to determine the level of economic dependence that the Romanian government can make on the tourism industry. Reliance on the industry for economic benefits will be used to determine the necessary input that the government will need on a cost benefit analysis.

In terms of determination of sustainability levels, it is important that communication links between various stakeholders is important for policy implementation. Local communication between stakeholders in the industry will be assessed for determination of management at the local level. Involvement of the local communities in the management and taking care of the resources does not only ensure protection of the resources but will create a balance of the ecological and sociocultural interests of the economy. According to Font and Tribe (2000), the management of Protected Areas Network (PAN) can only be useful and meaningful if the local communication is involved into the management of the tourist attraction resources. Due to the environmental and ecological contribution that tourism has been attached to, Romania has a responsibility to keep in touch with the other European Union countries. Due to the requirements of the engagement of environment protection regimes in Europe such as the World Wide Fund for Nature, local management of tourist areas is imperative in community involvement. Assessment of how the local community can be involved in the management of resources in tourist attraction sites (Keske and Smutko, 2010). It therefore follows that the incorporation of the local communities will be assessed in the government policy for rejuvenation of the economy through the tourism sector. Other stakeholders include regional and international tourist interest groups that will have an impact in the productivity of the industry. Investment into the tourism sector will require management of both local and foreign investment in order to tap the maximised revenues.

Research Methodology

The research will be conducted through an analysis of government data and European tourism information collected from various sources. Government policy documents regarding tourism will be reviewed to establish any loopholes that will expose the government to lose the opportunity of making considerable amount of revenue to finance the economy from tourism. A comparison with major European tourist destinations policies will be performed in order to shed light on the inadequacy of the policy framework. This will deliver the general policy guidelines regarding the necessary reorganization which will introduce the best European policy practices. In terms of specific government involvement in the management of the industry, it will be important to determine the various government structures involvement in tourism. Recommendations of government involvement which is likely to spur economic recovery will be made from the available policy framework as well as governance practices in Romania.

With regard to economic integration into the tourism system and industry, it will be important that the available industry strategies are assessed. Towards this end, the general application of the appropriate targets and the criteria used to set the targets will be assessed. Government participation through infrastructure and other tourism industry investment environment will also be assessed through economic survey. Economic features will be included in the overall government approach into the industry enhancement. Such features will include a comparison the economic growth projections which will incorporate the tourism element in order to integrate the industry into the main economy. Regarding community and other stakeholders’ integration into the government’s economic approach, available community and international tourism links will be assessed for the formulation of the appropriate recommendations.

Data Collection and Analysis

Data collection will be conducted from assessment of financial and economic reports for Romania as well as government policy framework with regard to the tourism industry. An analysis of the data will be conducted and compared with the best European tourism performers’ standards to facilitate the drawing of inferences. In terms of data analysis, specific areas of economy and tourism interaction will be identified and outlined in order for the formulation of recommendations. Firstly, government reports o economic performance, particularly the tourism sector will be analysed for the establishment of current capacity. Secondly, major European countries with exceptional performance in tourism will be analysed in order to obtain useful trajectories that can be used to learn new practices. In light of the Romanian government participation in tourism, a comparison of how other countries perform in the industry will be used to facilitate the policy and practice change to capture economic perspective of the industry. Governance and management issues will particularly be compared between the Romanian tourism industry and the selected European tourism giant. Management perspectives of the industry as a business entity in Romania will be analysed and compared as well. Government involvement in tourism spending and facilitation of tourism activities will be emphasized in most of these comparisons. Branding, for instance as well as facilitation of infrastructure supporting the tourism industry, will be assessed in terms of media presence and ranking among top tourist destinations. Comparing the performance of the major tourist destinations with the performance of Romania in respect to these details will facilitate data analysis for inference drawing.

The application of marketing and other management practices will be assessed in order to determine the necessary input that can be created for branding Romania as a leading tourist destination in Europe. This is because tourism is a competitive business that requires the creation of a competitive advantage over established and renowned tourist destination. The most important step towards the realization of this is enhancement of domestic tourism. Determination of the magnitude of domestic tourism in Romania will be conducted in order to establish how much input will be needed in order to enhance local tourism. It will be important to realize the importance of appreciation of the local industry by the home community for the creation of the appropriate reorganization (Beaumont and Dredge, 2009). From the level of appreciation of the domestic tourism, international tourism will be strategized from a better perspective. This will facilitate the formulation of the appropriate policy realignment that will be used in enhancement of the available capacity and performance improvement. Apart from the enhancement of available capacity, new strategies will be facilitated to capture the appropriate economic realignment.

References

Bailey, E. & Richardson, R. (2010) “A New Economic Framework for Tourism Decision Making,” Tourism and Hospitality Research, 10:367-376 Doi: 10.1057/thr.2010.14

Beaumont, N & Dredge, D. “Local Tourism Governance: a comparison of Three Network Approaches,” Journal of Sustainable Tourism 18(1):7-28 DOI: 10.1080/09669580903215139

Briedenhann, J. (2011) “The Potential of Small Tourism Operators in the Promotion of Pro-Poor Tourism,” Journal of Hospitality Marketing & Management, 20(3/4):484-500 Doi: 10.1080/19368623.2011.562439

Cottrell, S. P. & Cutumisu, N. (2006) “Sustainable Tourism Development Strategy in WWF PAN Parks: Case of a Swedish and Romanian National Park,” Scandinavian Journal of Hospitality and Tourism, 6(2):150-167 DOI: 10.1080/15022250600658838

Daniela-Luminita, C. & Constatin, M. (2008) “Tourism, Cultural Resources and Regional Competitiveness: A Case Study in Romania,” International Journal of Services Technology & Management, 10(1):48-60 Doi: 10.1504/IJSTM.2008.020346

Deskins, J. & Seevers, M. (2011) “Are State Expenditures to Promote Tourism Effective?” Journal of Travel Research, 50(2):154-170DOI: 10.1177/0047287510362785

Draghici, M., Ionica, D., Ionica, M. & Petrescu, C. (2010) “Services Specialization (A Possible Index) and its Connection with Competitiveness: The Case of Romania,” Service Industries Journal, 30(12):p2023-2044

Font, X. & Tribe, J. (2000) Forest tourism and recreation: case studies in environmental management. Wallingford, UK: CABI Publishing.

Hillen, S. (1994) “Romania Revives Dormant Tourism Industry,” Hotel & Motel Management, 209(18):9

Keske, C. & Smutko, S. (2010) “Consulting Communities: Using Audience Response System (ARS) Technology to Assess Community Preferences for Sustainable Recreation and Tourism Development,” Journal of Sustainable Tourism, 18(8):951-970 DOI: 10.1080/09669582.2010.484493

Lianu, C. (2007) “Linking Business Communities to Export Markets,” International Trade Forum, (2):20-21

Roger, T. (2001) “The Vampire Strikes Back: Romania Wants Bigger Cut of Dracula,” Wall Street Journal – Eastern Edition, 238(85):A1

 

 

 

How scarcity and choice have influenced recent U.S. federal budget problems related to business decisions.

 

Scarcity is a term that means, the people want more than the availability. Scarcity is a limit to both the individuals and the nation at large. As an individual limited time and income hinders one from engaging and having everything they would desire while as a nation, limited resources such as machines fixes a maximum on the amount of production. Scarcity always calls for a choice and as a nation or an individual we must settle on something that will satisfy our needs first. When scarcity and choice occurs, there is an increment of prices or increase in the cost of production leading to appreciation in monetary worth of goods (Ricardo, 2008). The appreciation in the monetary worth carries with it a demerit impact on the economy. The impact is considered in terms of minimizing employment opportunities and the regular use of the opportunity cost by individuals.

In the United States, the federal budget has become a powerful political issue, the deficits keep on rising and the economic melt down of previous years has led to a spike loaning, as most tax revenues depreciated and the government stepped up spur spending (Ricardo, 2008). Researchers have noted that, the current financial sector in this nation contributes to approximately twenty percent of national output, with the producing section contributing to approximately ten percent. The U.S national economy has become gradually more dependent on imports of goods and foreign capital that has not been utilized for productive investment but instead have assisted to sustain extra mass consumption and high government spending. This suggests that, the problems related to business decisions can only be solved by the U.S government considering their most basic needs and maximizing the available resources (Ricardo, 2008).

Identify market equilibrium and apply the concepts of supply and demand changes related to the price of gas.

Demand in the economic concept displays how much of a good or a service the consumers are willing and able to buy, at distinct price points within a particular time period. As everybody has some limited resources, they at one time forced to make a decision on what they are willing and able to buy and also at what price. For example let’s take an illustrative of the gasoline market, if the cost of gas is two dollars per liter, a number of people can be willing and able to buy like fifty liters per week on average. If by any chance the price depreciates to $ 1.75 per litter, some people might be able to purchase around sixty litters. With the price dropping to $ 1.50 per litter, consumers may be prepared to buy around seventy five litters. As the gas price depreciates everybody may decide to make more alternatives trips during weekends or holidays (Gilmore, 1999).

Buyer Demand per Consumer
Price per liter Quantity (liters)
demanded per week
$2.00 50
$1.75 60
$1.50 75
$1.20 95
$1.05 120

The above schedule, and possibly the consumer’s experience, displays the law of demand that is as the price depreciates the resultant quantity demanded have a propensity to appreciate. Since any price is a barrier, the higher the price of a commodity, the lesser the demand. When the price depreciates the demand appreciates. This suggests that there is an inverse association between price and quantity demanded (Gilmore, 1999).

On the other hand as the demand describes the consumer side of buying decisions, the supply relates to the manufacturers desire to make a reasonable profit. The supply schedule displays the amount of commodity that suppliers are willing and able to manufacture and make access to the market, at a given price points, within a specific time period. In brief, it exhibits the quantities that the suppliers are willing to provide at a range of prices (Gilmore, 1999). This occurs due to the fact that, the suppliers tend to have distinct costs of production. For instance at a minimal price, only the excellent proficient manufacturers can make a profit, and so only they can manufacture. In a situation of a high price, even the highest cost manufacturers can make a profit and so everyone can produce. By using our gasoline illustration, we find that several oil companies are much willing and able to supply definite amount of gas at firm prices.

Gas Supply per Consumer
Price per liter Quantity (liters)
supplied per week
$1.20 50
$1.35 65
$1.55 80
$1.70 90
$2.15 120

 

With a very low price of $ 1.20 per litter, the suppliers are willing to offer only fifty litters per customer per week. If the customers are willing to pay around $ 2.15 per litter the suppliers can offer one hundred and twenty litters per week. This suggests that, as prices appreciate, the quantity supplied also appreciates and as the price depreciates the supply also depreciates. This can be explained as a direct relationship. In order to determine the quantity of the goods and their price in the market, there is a need to find the price center where the buyers demand equals the amount that the suppliers are willing and able to supply, which is commonly known as equilibrium (Gilmore, 1999).

Equilibrium is a point whereby the quantity demanded is equal to the quantity supplied. This suggests that there is neither surplus of goods nor a deficit of goods. A shortage of goods takes place when the demand is higher than the supply. A surplus takes place when the price appreciates hence the consumer fail to purchase the products. Demand and supply analysis is mostly used to give explanation to the behavior of an excellent competitive market; however as an average of assessment it can be extended to any kind of a market. The analysis can also be generalized to exhibit variables across the economy. By marking out the quantitative and qualitative effects of variables that bring a change in demand and supply, whether in long run or short run, is an average exercise in applied economics. The Economic theory can also denote conditions such that demand and supply through the market is a proficient mechanism for assigning resources (Gilmore, 1999).

Grasp the limitations encountered in applying economic concepts to real world problems.

The mind view that many economists have of economics being a science as compared to others like physics lured them to expect that it can seek to explain the economic reality with similar accuracy and predicting facts in the universe. Economics must clearly realize that, it too is subject to limited outcome (Brown, 2003). The limits to clear-cut knowledge of an economic problem or situation are approached faster. The character of an economy is such that, the web of the net that the economists can merge to get hold of the reality is much coarser as compared to that of the natural scientists in their area. The economists have a tendency to overlook the need to comprehend how much precision is certainly achievable in the precision of the numbers used as well as the want to convey the margin of error available in an economic statistics (Brown, 2003). Sampling some errors for an apathetic universe are approximated and stated, though the limit of exactness in most rough economic approximate are seldom affirmed and sometimes not even recognized. The costs, prices, GDP are examples of the major data the economists depend on although they are not totally reliable. Yet now and again the economists use such numbers as though they were accurate.

Apart from these errors which are natural in all arithmetical calculations, there are some unique sources of error that stream from the nature of economics as a topic concerned with economy itself. As economic deals with data that account on or are the outcome of human activity, the application in the real world problems is sometimes in question. The world has no interest in misleading an astronomer, but an individual or an economic body may have a reason to hold back, cover up or distort information (Brown, 2003).

Evaluate theoretical economic concepts as they affect decision-making within the globalization of markets.

The inter-associations of a global common market suggest that the economic collapse in one region could impact other regions. With the rise and fall of economy across the globe, a number of producers are forced to make a realistic choice on the cost of their goods and services (Schiff, 2010). This may result to jobs being shifted from regions to regions that have lower wages, minimal worker protection and lesser health benefits as some companies may produce their goods and services in the minimal cost location. In case of an industrial activity this could cause production to shift to regions with the minimal pollution control or worker safety regulations.

With augmented economic interconnection has come deep seated political transformation, poorer peripheral nations have become more reliable on activities in central economies like the United States of America where technical expertise and capital tend to be assigned. A move in power away from the country state and toward has also been noted. As the economy within the global market fluctuates, there is a financial crisis emerging (Schiff, 2010). An important current growth in the wake of financial crisis is the spread of such a crisis to the rest of the economy and its relations with the more general crisis currently emerging. The major evident issue in such a case is the commencement of recession. The core reason for the recession is the reliance of consumer demand in particular but also industry investment on great levels of debt. Now that loaning is constricting this debt fuelled, development is no longer promising and a sharp economic slow down seems inevitable (Schiff, 2010).

Reference:

Brown, L., (2003). Building an Economy for the Earth. Hillsdale, NJ; Erlbaum

Gilmore, H., (1999). The Experience Economy. New York. New York Publishers

Ricardo, D., (2008). Principles of Political Economy and Taxation. London. Sheldan Publishers.

Roth, G., (2000). Economy and Society. Hillsdale, NJ; Erlbaum

Schiff, A., (2010). How an Economy Grows and Why it Crashes. New York. Macmillan publishers.

Sowell, T., (2007). Basic Economics: A Common Sense Guide to the Economy. Chicago. Macmillan Publishers.

How School District Superintendents’ Perceive Effected Curricular Or Instructional Change

 

Contents

1.0. Introduction. 1

2.0. Statement of the Study Purpose and Research Questions. 3

3.0. Study Method and Procedures. 4

3.1. Sampling and Data Collection. 4

3.2. Data Analysis. 6

3.3. Study Limitations. 6

4.0. Review of Previous Studies. 7

4.1. Introduction. 7

4.2. Superintendents as Managers. 7

4.3. Superintendents as Communicators. 9

4.4. Superintendents as Judges. 11

4.5. Superintendents as Teachers and as Students. 12

5.0. Significance of the Study. 14

References. 15

 

1.0. Introduction

For many decades school district leadership has been the focus of a vast body of research work (Bredeson & Kose, 2007; Cuban & Usdan, 2003; Klatt, 1996). Perhaps this phenomenon has been occasioned by the urge among educators and policymakers to establish what these leaders can do to foster changes in school districts or reform aspects of educational programming. Analytically, these studies have advanced a lot of information regarding school superintendents as change agents. Precisely, it has been established that superintendents employ a wide range of strategies to execute their mandate and most importantly, to successfully mitigate the “nearly continuous turbulent … [bureaucratic, unpredictable and] inescapable” environment which they work in (Begley, 2004; Kowalski, 200; Portis & Garcia, 2007; Starratt, 2004, p.29). In this regard, it is only fair to assert that change cannot be achieved without first overhauling these complex work environments.

School superintendents have changed over the years from the mere instructional leaders they used to be to the multitasked administrators who operate in complex and ever dynamic socio-political and cultural environments engulfing school districts (Alsbury, & Shaw, 2005; Canales, Tajeda-Delgado, & Slate, 2008; Portis & Garcia, 2007). It is conventionally acknowledged that school district superintendents are the persons at the pivotal position for implementing any form of school reforms (Alsbury & Shaw, 2005; Babb, 2008; Barnett, 2004; Murphy, 1994). Tellingly, many studies concur that superintendents assume leadership roles in their respective districts (Carter & Cunningham, 1997; Reeves, 2002; Thomas & Moran, 1992; Waters & Marzano, 2007). As leaders they are responsible for the day-to-day implementation of all policy matters as directed by local, state, and federal educational requirements (Reeves, 2002). Similar sentiments are shared by Katz and Khan (1978) and by Kowalski (2000) that school leadership and management are complex processes that require maximum dedication from the superintendents particularly in initiating and implementing change.

Interestingly, existing research work that attempts to address these processes does not sufficiently explain how some of the critical facets of leadership and management take place. Few attempts have been made to demonstrate in operational terms how school superintendents effect change, with extant research only advancing the various roles played by school superintendents as change agents.

Moreover, though some existing studies provide frameworks within which superintendents operate, it is only wise to assert that the highly dynamic education sector have rendered some of them irrelevant. Changes that have engulfed contemporary education sector have brought about discrepancies between what some existing studies advance and the actual happenings in educational leadership at the local levels particularly in regard to what superintendents should do to enhance academic excellence within their districts.  For instance, it is obvious that the varied socio-economic and political structures occasioned by hard economic times, diversionary politics, ethnic diversity make it very hard for school superintendents to embrace or impart change in their respective school districts in equal measures.

It is very unfortunate that there is no existing empirical evidence detailing how school district superintendents go about imparting change at a time when the educational sector just like many other sectors, is going through a period of rapid restructuring courtesy of the mounting pressure from educational stakeholders. As such, there is need for carrying out a focused and impartial research work to investigate how these administrative officers effect change in their respective school districts.

2.0. Statement of the Study Purpose and Research Questions

The purpose of this study is to examine how selected school district superintendents’ perceive how they have effected curricular or instructional change. Employing interviews with superintendents who oversee multi-building districts and who have held their positions for five or more years, the study will be guided by the following two research questions:

  • What strategies have superintendents used to effect curricular or instructional change in their districts?
  • What strategies do school district superintendents apply in handling pressure from stakeholders while still delivering their mandate?

Essentially, going by the increasingly dynamic socio-political and cultural trends in the education sector occasioned by the desire to harmonize educational goals with the contemporary economic, political and social indicators, the technological advancements as well as the advent of globalization these noble aims are justified. For instance, it has been argued that the school district superintendents work under intense pressure in bringing about dramatic improvements in student test scores while simultaneously meeting the needs of an increasingly diverse and multicultural student population.

On the other hand, based on the conventional wisdom that superintendents have successfully impacted in some critical areas of their overall mandate (Hentschke, Nayfack, & Wohlstetter, 2009), there is need to critically investigate how they succeed in doing this despite operating from potentially conflicting environments. Apart from seeking to establish how school district superintendents impart change, this research study will also seek to lay bare some of their strong and weak areas insofar as educational leadership is concerned. Perhaps the strongest part of this study is that its findings will advice policy formulation and implementation particularly in the areas of improving smooth coexistence between all educational stakeholders at the federal, state, and local levels.

3.0. Study Method and Procedures

This study will examine how school superintendents go about imparting change. Employing an exploratory, qualitative research methodology will be the most appropriate given its capacity to identify the superintendents’ perceptions of how they effect change.  Creswell’s (2003) postulations concerning interviews and case studies suggest that a qualitative approach offers the best option for examining these perceptions.

3.1. Sampling and Data Collection

The study population will be practicing school superintendents within a 100-mile radius of the researcher’s residence in Moline, Illinois. Only a small fraction of this population will be considered for the study. Ten superintendents will be selected. This is in accordance with Ader, Mellenbergh, and Hand (2008), who postulate that a study sample should enhance easy data collection. To ensure that this is achieved, the superintendents will be selected on the basis of their experience in the field of education leadership – superintendents who oversee multi-building districts and who have held their positions for five or more years. Given the small size of the study sample there will be no coercion for participation – school superintendents will be approached and their consent for participation sought.

To identify the suitable potential participants the researcher will consult the state of Illinois public schools records. From there the researcher will be extract personal contacts for superintendents fitting the selection criteria. Letters seeking the consent for participation will be sent to these superintendents through the post office. A response form and a postage paid envelope will accompany those letters. The superintendents will be given a two-week period to return the consent forms. Follow-up emails and phone calls will be used for those who do not return the envelope within the provided timeframe.

The responses will be studied with view of identifying superintendents willing to take part in the study and those who are not. The names of those who will be willing will be listed down alphabetically and numbered from 1 to say, 100. Using a random number generator, the researcher will select 10 numbers from the alphabetically listed names. The study participants will be picked based on these 10 random numbers (Bartlett, Kotrlik, & Higgins, 2001).

To enhance confidentiality the selected superintendents’ will be assured that their personal information will not be revealed – only information relevant to the research problem will be collected from the participants. Moreover, so as to enhance participation the superintendents will be assured that the study will only rely on the information that they will be willing to divulge.

The study will use interviews as its only data collection instrument. So as to capture as many data as possible, the interviews will be structured according to the questioning techniques offered by Creswell (2003) and Kvale and Britmann (2008) – both open and closed questions will be used. The interviews will cover both professional as well as personal skills that superintendents utilize in executing their mandate. Moreover, so as to enhance depth of information, some interview questions will include mini-questions (follow-up questions). Such follow-up questions will be structured in a friendly manner so as to enhance the propensity for eliciting correct answers.

The structured physical interviews will be conducted in venues convenient with the busy superintendents’ daily schedules. To some extent, telephone and online interviews may be used particularly for those participants with busy schedules or who may be travelling during the study period (Creswell, 2003). Data collected from these interviews will be studied, transcribed, coded and analyzed (Maxfield & Babbie, 1995).

3.2. Data Analysis

Due to the intensive nature of the proposed research problem, data collected through the structured interviews and questionnaires will be analyzed using a continuous method (memoing) (Birks, Chapman, & Francis, 2008). First, data from the structured interviews and questionnaires will be subjected to a purposive scrutiny to check accuracy. Then it will be closely studied and all important information (main points) in regards to the research problem will be jotted down in a memo in form of short notes. These short notes will be transcribed for easy analysis using qualitative data analysis method. The transcribed data will then be subjected to further scrutiny and coded into meaningful units for easy analysis (Maxfield & Babbie, 1995). For instance, likely codes in the study may include: conflict solving, communication, mentoring, coercion, in-servicing, role modeling, etc.

3.3. Study Limitations

Very minimal limitations are anticipated in this study. This is courtesy of the sampling methods (voluntary and random) as well as the relatively large study area (100-mile radius). For instance, the carefully conducted sampling procedure will ensure that study participants do not withdraw from the study until the research is completed.

Even so, given that the study will depend on interviews as the only data collection tool it is feared that some participants may be tempted to give untrue information. Determining the authenticity of some information gathered in the interview will be a relatively challenging endeavour. In this regard, the researcher will only rely on the good will and honesty of the participants in analyzing and drawing inferences from the data collected.

4.0. Review of Previous Studies

4.1. Introduction

Conventional wisdom regarding the nature and scope of many social systems holds that, meaningful change cannot be achieved on a silver platter (Schein, 1985). Administrators, managers, leaders, as well as their followers need to tirelessly work for it, perhaps by initiating and following through change-inducing interventional measures compatible with their respective areas of jurisdiction (Robbins, 2003). In the case of school systems at the district level for instance, it has been advanced that meaningful change cannot be achieved without first overhauling the existing organizational structures to complete overhaul (Baumman, 1996; Fullan, 1996; Hess, 1998; Kowalski, 2000; Kowalski, 2001). Precisely, policymakers have singled out school culture as the most pertinent area that needs to be addressed for change to be fully realized (Baumman, 1996; Fullan, 1996).

This chapter provides a comprehensive review of the existing literature of school district superintendents as agents of change. So as to bring out the ideas clearly the review is arranged into the following sub-headings that denote the salient roles that school superintendents play as they go about imparting change:

  • Superintends as managers
  • Superintends as communicators
  • Superintends as judges
  • Superintendents as teachers and as students

4.2. Superintendents as Managers

Reforms that have engulfed the educational systems in various states and local school districts over the last decade have greatly changed the roles of superintendents. As a matter of fact, contemporary educational systems are characterized by accountability and transparency in matters of school management and classroom instructions (Bjork, Kowalski, & Browne-Ferrigno, 2005). Consequently, superintendents today act as accounting officers, professional educators, curriculum developers, instructors, and evaluators (Bredeson & Kose, 2007; Babb, 2006). Precisely, Carter and Cunningham (1997) assert that just like conventional management officers in other social sectors, superintendents offer professional and technical advisory services that revolve around good resource management practices. On his part Weiss (2003) adds that as managers school superintendents successfully meet state and federal academic requirements by indulging in a gamut of strategies, which in this case comprise the sum total of all efforts geared toward improving students’ academic performance.

Moreover, due to the inherent “crossroads” atmosphere within the realm of educational leadership, superintendents’ roles have evolved over the years (Myers, 2010). Thomas and Moran (1992) for instance assert that, superintendents are managers just like other conventional managers who “manage great business or industrial enterprise” (p. 42). Myers (2010) asserts that if they are to effectively fulfill these changing roles, superintendents should be professionals and not employees. Precisely, it has been noted that they succeed in inducing change within their respective school districts by practicing sound planning and time management skills (Hanglund, 2009; Myers, 2010; Reeves, 2002). Thomas and Moran (1992) describes superintendents as, “planners and thinkers” of policy changes (p.42). In extension, Reeves (2002) argues that superintendents achieve desired goals and objectives by acting as “the bridge[s] from chaos to clarity for every stakeholder so that students, teachers, parents, leaders, and the broad community know what success really means” (p. 77). Precisely, the management role of policy implementation has been noted among superintendents particularly as they struggle to make key decisions, coordinate students’ evaluation, and deliver measurable academic results as per the requirements of various legislative enactments such as the popular No Child Left Behind of 2001(Haglund, 2009).

4.3. Superintendents as Communicators

Waters and Marzano (2006) further elucidate that in order to successfully get other educational stakeholders to take active roles in change drives at the school district level superintendents employ good communication tactics that help to create new and sustainable relations with their subordinates.  Similar sentiments are echoed by Carter and Cunningham (1997) when he asserts that superintendents overcome the highly unpredictable stakeholders’ demands by acting as “the communicator[s] to the public” (p.24).

Davis, Darling-Hammond, La Pointe and Meyerson (2005) argue that the demands made on contemporary education systems are enormous. There is more accountability on the part of a school superintendent’s job than it has ever been witnessed before. In reference to the requirements of the No Child Left Behind Act for instance, the superintendents are expected to deliver convincing results or else risk their districts forfeiting important funds from the federal government. In a bid to avoid such financial forfeiture the superintendents explore all ways of getting those under them to carry out their duties fully. Based on the findings of a research study commissioned by the Wallace Foundation and carried out by researchers from the Stanford Educational Leadership Institute, school leaders have been noted to employ a range of methods in effecting desired change. Among these methods is the conscious effort made to improve student academic performance through “the support and development of effective teachers and the implementa­tion of effective organizational processes … prepara­tion and licensing requirements, which generally subscribe to a set of common expectations for the knowledge, skills, and dispositions of school leaders” (p.5).

These arguments are also galvanized by the findings of a survey conducted among nine Manitoba, Canada superintendents where it was revealed that superintendents acknowledged their responsibilities as communicators of new knowledge among the various school heads within their school districts (Wallin & Crippan, 2007). Similar sentiments are shared by Waters and Marzano (2006) when they argued that as competent communicators, superintendents directly coordinate local stakeholders in the overall implementation within their respective school districts of requirements imposed by federal funding agencies.

In connection to this, studies concurringly echo that as part of their efforts to fulfill their mandate, school superintendents assume active leadership roles (Carter & Cunningham, 1997; Reeves, 2002; Thomas & Moran, 1992; Waters & Marzano, 2006). As leaders, they are responsible for the day-to-day implementation of all policy matters as directed by the local, state, and federal educational requirements (Reeves, 2002). Analytically, they earn the leadership status by making timely and bidirectional communications between those at the helm of education management and their local levels counterparts.

Superintendents manage change processes within their areas of operation by indirectly communicating with the public through the media people. As Jenkins (2007) found, superintendents get a chance to tap in on the benefits that comes with the “power of pen” through closely working with the media (p.31). The media is capable of painting a good picture of the school system and its processes, in fact if coordinated well so that it does not portray the negative side of the school system it can go along way in creating a good rapport between the public and the school management systems in the school district. To achieve this nature of coordination however, Langlois (2004) offers that the school district superintendent should maintain a close tab on the media so that quick actions can be taken to prevent any form of miscommunications such as leaks of uncensored information to the media that might harm the credibility of the school district.

4.4. Superintendents as Judges

In their study Alsbury and Shaw (2005) posit that, while acting to mitigate the unrelenting pressure from various educational stakeholders as well as diminishing funds, school district superintendents’ pursue education consolidation interventions. Such consolidation interventions, though controversial, directly enhance a sense of justice among all the school stakeholders as they open up new avenues for social justice.

Firestone and Martinez (2007) found that the responsibilities of a school superintendent are multifaceted. They entail directly working with the school boards, principals, teachers, students, on one side and the state and federal representatives’ one the other (Sergiovanni et al, 2009). As such, being a superintendent demands high levels of impartiality so as to effectively deal with the conflicting opinions from these two sides while ensuring that the interests of all the stakeholders are fully served (Kowalski, 2004). In a nutshell, this process of absorbing pressure, cracking complex organizational puzzles, formulating workable policies to address challenges, and most importantly fulfilling the demands and expectations of all the educational stakeholders within the school district and beyond cannot be made a reality without first embracing and pursuing the concepts of change (Robbins, 2003; Schein, 1995).

In the same note it has been advanced on several accounts that superintendents achieve change by taking impartial positions particularly in the face of pressures and differing opinions from the stakeholders.  Hoyle, Bjork, Collier, and Glass (2005) affirm that superintendents achieve change by acting as primary interpreters, initiators, and in extension, as leaders in their respective school districts. On the other hand, Bredeson and Kose (2007) opine that in the process of imparting change superintendents not only assume administrative roles but also assume instructional roles by engaging subject teachers and school principals in regular capacity building workshops.

An extensive account of school superintendents as judicial officers is offered by Marzano, Marzano and Pickering (2003), who argue that the school superintendent judicially handles all classroom related issues, gives timely and relevant responses to all concerns from stakeholders, solves conflicts among stakeholders in amicable ways, addresses political overtones related to education, and addresses the demands of school boards. Similar sentiments are shared by Portis and Garcia (2007), when they acknowledge that school environments are at times awash with all sorts of conflicts, with the superintendent acting as an impartial judge of the last resort.

Kowalski (2005) argues that change in both elementary and secondary schools’ has been realized not as a result of efforts by educators themselves but by external forces. In support of his assertion Kowalski contends that, “the impetus to refashion organizational structure or operations has been predominately external … [and that majority of] changes that have occurred in districts and schools have been imposed” (p.60). In essence, the school superintendents in their capacity as the link between the state/federal education authorities and the school boards have been in the forefront of imparting this change (Kowalski, 2004). For instance, the implementation of key federal educational directives such as the No Child Left Behind Act as well as state legislations dealing, for example, with performance-based school programs are implemented by the superintendents. This position is supported by the conviction that school reforms emanating from state or federal levels need to be locally coordinated for them to fully fit into the system (Kowalski, 2003).

4.5. Superintendents as Teachers and as Students

So as to successfully overhaul the existing school culture, school superintendents assume the double roles of teachers and students. Using a qualitative methodology, Babb (2008) found that indeed school district superintendents spur change. The author indicated that superintendents create active learning environments among school teachers and go ahead to learn together with them. The study explained that by actively taking part in the learning process, district-level educational stakeholders enhance their chances of putting into practice what they learn. Babb argued that when educational stakeholders indulge each other in discussing the expected changes they are more likely to embrace them.

Similar sentiments are shared by Kowalski (2005) who offered an extensive account of how school superintendents effect change in their respective areas of jurisdiction. In making this account he paid tribute to Callahan (1966) who portrayed the school superintendent as an applied social scientist. He acknowledged that deployment of a barrage of social science theories (such as role theories, change theories, and social learning theories) has enabled superintendents to engage in more result-driven endeavors of administration and leadership. However, so as to be in a position to juggle these social sciences theories, superintendents require intensive training and hands-on experiences.

As applied social scientists, school superintendents employ empiricism, scientific inquiry methodologies, as well as the skills of drawing inferences from leadership experiences and using such inferences to plan for the future. Most importantly, as Kowalski (2003; 2004; 2005) and Johnson & Fusarelli (2003) have asserted, school superintendents fulfill their roles as change agents by incorporating the dynamics of behavioral sciences into the school system as well as by deploying theory in discerning the behavioral changes exhibited by educational stakeholders in their areas of jurisdiction.

While extending the applied social scientist methodology, Fusarelli and Fusarelli (2003) contend that, apart from the mere responsibility of discerning problems and formulating policy to ameliorate such problems, school superintendents also employ enculturation tactics. This entails the de-freezing process advanced by Kurt Lewin in his three-pronged theory of change (Robbins, 2003). Ideally, superintendents prepare the ground for change by highlighting key shortcomings of existing processes or institutions, and then ensure that all the stakeholders are perfectly convinced that there is an urgent need for change. To achieve this they carryout institutional as well as procedural restructuring by way of inducing a new and popular culture that bars subjects from reverting back to the old order. Opportunistically, they then move in with the intended reform packages which they rollout to the stakeholders in practical and operational ways. For example, they do this by drawing out direct links between the new reforms packages and deep-seated social ills such as poverty, unemployment, insecurity, climate change, terrorism, etc.

Moreover, while basing their arguments on the educational challenges of the 21st century theorists’ Murphy (1991), Chance and Bjork (2004) assert that the contemporary education systems need to address the social part of the students needs. This opinion is galvanized by Schlechty (1997) when he asserted that school superintendents should appreciate that “the way social systems are put together has independent effects on the way people behave, what they learn, and how they learn what they learn” (p.134). Analytically, the human relations that school superintendents cultivate are directly responsible for bringing about new knowledge and skills. In essence, change, or the lack of change is greatly determined by the nature of the social interactions among the leaders and their subjects (Kowalski, 2003; 2004; 2005).

5.0. Significance of the Study

The concept of change as envisaged by Kurt Lewin is a complex one – it embraces a three-pronged successive framework of unfreezing, changing, and refreezing (Schein, 1995). Ideally, change demands high levels of commitment and selflessness on the part of the change initiators and most importantly, “some form of dissatisfaction or frustration generated by data that disconfirm our expectations or hopes” to make it happen (p.3). Similarly, school leadership and management is a complex process that requires significant amount of time, capital, and human resources (Katz & Khan, 1978; Kowalski, 2000). Precisely, as the chief executive officers and agents of change in their respective districts, superintendents have a lot of responsibilities. In this regard, attempts to investigate how they go about executing their mandate will not only lay bare the strategies of imparting change but most importantly will bring awareness among education stakeholders in the district levels. Consequently, it is envisaged that such awareness will enhance the process of imparting change as stakeholders will be more willing to undertake new programs if they are well aware about their impacts to the quality of education (Robbins, 2003).

Moreover, basing on the notion that change in academic realms assumes a number of facets that revolve round sound leadership practices (Portis & Garcia, 2007), it is envisaged that this study will provide a platform on which educational stakeholders can better engage their superintendents particularly in matters of policymaking and implementation.

The fact that prior studies on school leadership and management have not provided a framework within which superintendents go about imparting change heightens the expectations on this study. Precisely, the study will not only provide a framework within which superintendents work in but will induce quality and substance on school leadership and management as it will serve as an “eye opener” to entry-level school leaders.

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How Rational Choice Theory Applied In The Life Of Frank Lucas

How Rational Choice Theory Applied In The Life Of Frank Lucas

Contents

Introduction. 1

The Life and Business Acumen of Frank Lucas. 1

Conclusion. 7

Works Cited. 7

Introduction

Rational choice theory is a method for understanding how human behaviors is influenced by the goals one seeks to achieve rather than the means used to achieve the goals. By making a rational choice, an individual looks at the most cost effective means to achieve a specific goal to maximize personal gain. In criminology, rational choice theory applies when analyzing the relationship between means and goals and between costs and benefits in the quest to arrive at the best possible choice. The life and times of the infamous drug lord, Frank Lucas, provides one of the best studies of the application of rational choice theory in crime.

The Life and Business Acumen of Frank Lucas

The motivations and exploits behind the success of Frank Lucas’ drug business can best be understood by examining his biography. He was born in 1930 in La Grange and grew up in Greensboro, North Carolina. Growing up in the rural areas during the Great Depression Lucas lived in the same poor conditions like the other Africa-Americans. His childhood experiences provided the greatest motivation for his criminal life. For instance he remembers with clarity the day he witnessed the murder of his twelve year old cousin by the Ku Klux Klan for the crime of looking at a white woman flirtatiously.

Being the oldest boy in the family, Lucas was faced with a task of finding means of survival not only for himself but for his siblings too. Finding a job during the Great Depression was made even more difficult by his African-American status. The only alternative for survival was to steal food for family which later progressed to mugging intoxicated patrons of a local bar. These were the beginnings of his criminal career. Later he would get a job but would hardly hold on to the job long enough. In his first job, Lucas did not only sleep with his boss’ daughter but stole four hundred dollars before setting the company premises on fire. The incident forced him to seek refuge in Harlem for fear of being sent to prison (Biography.com).

Lucas arrived in Harlem in the year 1946 with a mind set on making money on the streets thorough illegal gambling and drugs. His zealousness and ambition to succeed led to a series of crimes ranging from robbing a local pub at gun point to stealing a tray of diamonds from a jewelry store and breaking into a high-stakes crap game at a local club to rob the players. Every move he made turned him into a more ruthless gangster.  His reputation earned him recognition by a long time Harlem gangster Ellsworth “Bumpy” Johnson. He joined the Johnson gang after shooting a fellow drug dealer over a business deal.

Though nobody can accurately tell how close Lucas became to Johnson, it is evident that he must have been his right hand man for he took over the helm of the drugs business in Harlem after the death of Johnson (Johnson 159).  It is also probable that after Johnson’s death in 1968, a leadership vacuum was created in Harlem. Lucas, being the most streetwise gangster at the moment, seized the opportunity and gained control over the drugs business. The man whose dream was to be as rich as Donald Trump had arrived and he immediately set in motion his ambitious plans to control and improve the drug trade in a style he called “backtracking.”

Frank Lucas was industrious enough to take the drug industry to another level. He would lock himself in a hotel room for a month or two away from any distraction to come up with the best way to make money from the drug business. His backtracking style involved going back to his past experiences and linking it to the present and future conditions to come up with solutions for improving operations. This showed that Frank Lucas knew that to take over from Johnson’s operation he had to be brilliant enough to learn from past mistakes.

The biggest challenge to Lucas was in dealing with the Italian Mafia operatives who were the middlemen in the drug trade.  He believed in being directly involved from the source of heroin in Thailand to the customers in Harlem as the best way of gaining total control of the trade.  The Vietnam War was at its height by 1968. It provided a lucrative opportunity to many drug businessmen including Frank Lucas. Most of the U.S personnel in Vietnam had already become addicted to heroin and provided a steady market when they returned home. Lucas was not one to miss out on this opportunity and knew the best way of exploiting this market fully was by travelling to Thailand to make direct contact with the source of heroin.

The potential for risk is always present in every business venture but in the drug trade the risks were even higher. Lucas well understood the risks involved but could not let them, or anything else for that matter, stand in the way of his quest of controlling the drug empire in the streets of Harlem. With the help of his cousin’s husband, Leslie “Ike” Atkinson who ran a bar frequented by African American soldiers, Lucas was able to establish a way of transporting drugs from Thailand to the US using military transport.

The creation of what Lucas termed as army inside an army through bribing high ranking military officers facilitated the international trafficking of heroine. These officers were from both the American and the Vietnamese sides. The recruitment of all members in Lucas’ operation was conducted personally. This enabled him to oversee his operations from the poppy fields in Thailand to the streets of Harlem. In Harlem his brothers who were known as the “country boys” controlled the distribution.

Frank Lucas understood well enough that an affordable price would increase demand for his heroin and thus he sold his supply at relatively cheap price. His ability to source for heroine from the planters at a cheaper price made it possible for him to sell it at a relatively low price but to a large customer base. At the time a kilo of heroin in Thailand cost four thousand dollars while the street price in New York was fifty thousand dollars. With no middle men Frank found it easy to control the price in the streets. This is one of the key factors that facilitated his taking over and control of the drug business in Harlem. The business was performed in a strict code of operations that involved instilling fear and respect in all who were part of the international investment.

Rational Choice Theory in the Life of Frank Lucas

According to Siegel, a rational choice approach to crime causation is composed of several different concepts (14). According to this theory, criminal behavior is the product of careful thought and planning. Offenders choose crime after considering personal factors like money, revenge, thrills, entertainment and situational factors, such as target availability, security measures, and police presence. This entirely depends on the information available to them and how critically they analyze it.

Rational choice theory in environmental criminology is concerned with crime causation elements like availability of a suitable target, the motivation behind the intent to commit crime, and the lack of a figure of authority to prevent the crime from being committed (Keel). Frank Lucas must have critically analyzed the three elements crime causation and identified an opportunity to establish his empire.

From the beginning Lucas has been keen on looking for an available and suitable target. This attitude can be traced back to his early days in North Carolina where he used to prey on intoxicated customers outside a local bar. He understood well enough how intoxicated people were vulnerable and therefore easy victims for him. After the death of Johnson in 1968, Lucas understood well enough that the Vietnam War had increased the demand for heroin. This meant that there was an available market for heroin which he could capitalize on for his personal gain. The market was an available and suitable target which is one of the major elements of crime causation in rational choice theory.

Rational choice theory identifies motivation behind the intent to commit crime as another element responsible for commission of crime. The motivation behind Frank Lucas’ criminal life was to become what he called “Donald Trump rich.” This was his major motivation factor. The desire to be rich would not let anything stand on his way. The use of violence and infliction of fear were his tools of trade in fulfilling his desires. Johnson’s death which brought him the control of Harlem was also a motivation factor that drove Lucas to devise ways of overcoming competition in the trade. In rational choice theory, human motivation is a major factor in determining the social or economic related behavior.

The only highest cost of committing a crime is the risk of being caught. This idea makes up the third element in environmental criminology which holds that a crime will occur if there is no authority figure to prevent it from happening. Lucas took this argument a step further by finding the best way to keep the authority away from interfering with his criminal activities. He did it in a very sophisticated way, taking advantage of the corrupt of New York Police Department’s of Special Unit Investigation (SIU). It said that at one point Lucas was arrested but he negotiated for his release with an offer thirty thousand dollars and “two keys” of heroin.

On the Thailand connection which was his main source of heroin, Lucas used the military in Vietnam to help him in acquiring and transporting heroin to America. He did this by bribing the army officers to eliminate the obstacles presented by authorities.  Transporting the heroin using the military was easier because the army planes were not subjected to frequent checks like other planes at the airports. The business environment was even made more conducive by the war since the government was too busy waging war in Iraq to concentrate on fighting drug dealers.

Rational choice theory played a bigger role in defining Lucas’ criminal activities. Prevention of Lucas criminal activities was a major task to the United States Government. Clarke states that crime prevention theories focus on reducing crime opportunities rather than on the characteristics of criminals (21). This means that increasing risks and barriers of committing a crime and reducing the gains of a criminal activity will reduce the possibility of the crime being committed. Specifically, the formation of Special Narcotics Task Force (SNTF) in 1971 was an example of Situational Crime Prevention strategy that the Justice Department formed to prevent the narcotics trade. This strategy was enforced by strong personnel who were well informed and of high integrity. An example is Richard Roberts who was made the head of SNTF. He was a man of integrity, having been a former U.S marine and a graduate of law. His presence in fighting narcotics increased the risk of being caught. He was instrumental in the famous raid of Lucas’ house in 1975. Though there was no direct evidence to link Lucas Directly to the heroin business in Harlem, the raid set in motion further investigations into the criminal activities of Lucas.

Roberts was brilliance in investigation and interrogation led to the arrest of one of Lucas’ “country boys” who gave names of the main participants in the Harlem heroin business and how the operations were conducted. This confession provided the basis of the evidence Roberts used to finally convict Lucas.

Conclusion

Frank Lucas biography is a testament of how he employed Rational Choice Theory in many instances to perfect his criminal activities. He was able to identify an available suitable target which was the source and market for heroin and use it to his advantage. He was motivated by his dreams to be as rich as Donald Trump and could not let anything stand in the way of his ambitions. To eliminate the threat of having a figure of authority preventing him from committing crimes, he bribed government officials from the military personnel to the local police. He made rational choices to build a drug empire with little regard to the means used in achieving this goal.

Works Cited

Biography.com. Frank Lucas Biography. 1996. 16 Nov. 2010.            <http://www.biography.com/articles/Frank-Lucas-253710?part=0>

Clarke, R. V. “Situational crime prevention” in Building a Safer Society: Strategic Approaches to            Crime Prevention. Chicago: The University of Chicago Press, 1995. Print.

Johnson, Mayme Hatcher. Harlem Godfather: The Rap on my Husband, Ellsworth “Bumpy”        Johnson. New York: Oshun Publishing Company, Inc., 2008.

Keel, R. O. Rational Choice and Deterrence Theory. 1997. 16 Nov. 2010.            <http://www.umsl.edu/~keelr/200/ratchoc.html>

Siegel, Larry. Criminology. New York, NY: West Publishing, 1992. Print.