Table of Contents Acknowledgements iii Table of Contents v List of Tables ix Abbreviation x CHAPTER 1: INTRODUCTION 1 1.1 Introduction 1 1.2 Aims and Objectives 2 1.3 Structure of Thesis 3 CHAPTER 2: LITERATURE REVIEW 5 2.1 Introduction 5 2.2 The Credit Risk of Banks 5 2.2.1 Definition 5 2.2.2 Need for Credit Risk Analysis 6 2.2.3 Categories of Credit Risk 6 a-) Default Risk 7 b-) Counterparty Settlement Risk 7 c-) Exposure Risk 8 d-) Country Risk and Sovereign Risk 8 e-) Credit Spread Risk 8 2.2.4 Identifying Credit Risk Exposures in Banks 9 2.3 General Principles of Sound Credit Risk Management in Banking 9 2.3.1 The Goal of Credit Risk Management 9 2.3.2 The Principles of Credit Risk Management 10 a-) Establishing a Suitable Credit Risk Environment 10 b-) Operating Under a Sound Credit-Granting Process11 c-) Sustaining a Suitable Credit Administration 11 d-) Confirming Sufficient Control of Credit Risk 12 2.4 Credit Risk Measurement 12 2.4.1 Fundamentals of Credit Risk Measurement 13 2.4.2 Credit Risk Rating 13 a-) Internal Credit Ratings 14 b-) External Credit Ratings 14 2.4.3 Credit Scoring System 16 2.4.4 Credit Risk Modelling 17 a-) Merton Based Model 18 b-) Rating Based Model 18 c-) Actuarial Models 20 d-) Macroeconomic Models 21 2.5 Financial Performance 22 2.5.1 Capital Adequacy 23 2.5.2 Asset Quality 24 2.5.3 Management 24 2.5.4 Earning 25 2.5.5 Liquidity 25 2.6 Credit Risk Management and Financial Performance 26 2.7 Issues in Credit Risk Management 30 2.7.1 Adverse Selection 30 2.7.2 Moral Hazard 31 2.7.3 Credit Risk Concentrations 32 CHAPTER 3: METHODOLOGY 33 3.1 INTRODUCTION 33 3.2 METHODOLOGICAL APPROACHES FOUND IN IDENTICAL RESEARCH 33 3.3 PANEL DATA 39 3.3.1 Fixed Effects Model 40 3.3.2 Time-fixed Effects Models 41 3.3.3 Summary of Fixed Effects Model 42 3.3.4 The Random Effects Model 44 3.3.5 Summary of Random Effects Model 45 3.3.6 Fixed or Random Effect 46 3.3.7 Hausman Test 46 3.3.8 Actual Model 47 3.3.9 Hypothesis 50 3.4 DATA DESCRIPTION 50 3.4.1 Data Sources 51 3.4.2 Sample Selection 52 3.4.3 Limitations of Data Sources and Sample Selection 54 CHAPTER 4: FINDINGS 57 4.1 Introduction 57 4.2 Descriptive Statistics 57 4.3 Correlation Matrix 59 4.4 Analysis of the EU Banks the period of 2003-2013 60 4.4.1 The Relationship Between ROA and Credit Risk Management 61 4.4.2 The Relationship Between ROE and Credit Risk Management 63 4.5 Analysis of Group 1 during the Financial Crisis 66 4.5.1 The Relationship Between ROA and Credit Risk Management 66 4.5.2 Relationship Between ROE and Credit Risk Management 67 4.6 Analysis of Group 1 before Financial Crisis 68 4.6.1 Relationship Between ROA and Credit Risk Management 68 4.6.2 Relationship Between ROE and Credit Risk Management 69 4.7 Analysis of Group 2 during the Financial Crisis 70 4.7.1 Relationship Between ROA and Credit Risk Management 70 4.7.2 Relationship Between ROE and Credit Risk Management 71 4.8 Analysis of Group 2 before Financial Crisis 72 4.8.1 Relationship Between ROE and Credit Risk Management 72 4.8.2 Relationship Between ROE and Credit Risk Management 73 4.9 The Summary of the Findings 74 CHAPTER 5: CONCLUSION 79 5.1 Introduction 79 5.2 Main Findings Discussions 79 5.3 Summary 81 5.4 Conclusion 83 5.5 Recommendations for Policy 83 5.6 Limitations of the Study 85 5.7 Recommendations for Further Research 85 6. REFERENCES 87 Özet 101.