1. Discuss one way in which wholesale credit risk arises and the tools and techniques which can be used for its

management. You are required to write 500 words about this topic, and use of academic references to support your

discussion is encouraged.
2. Use the data uploaded in Moodle to predict UK SMEs default events by implementing the relevant accounting-based model.

The process of analysis and results should be discussed in no more than 1000 words. The required tasks are as follows:
 Use the information in the Altman and Sabato, (2007) study and predict SMEs default by using 5 main accounting

indicators mentioned in the study. You need to build the accounting-based model by using the data from 2000 to 2007. You

need to use at least 5 years of data for building the model.
 Estimate the type 1 and type 2 errors by testing your model in the hold-out sample and estimate the prediction accuracy

of the model. The hold-out sample should be selected from 2008 financial data. You need to select any random active and

inactive firm from 2008 to make the default rate of the hold-out sample equal to 10%. For example, for the hold-out sample

of 100 firms, select 10 inactive and 90 active firms.
 Using the Basel IRB method, calculate the capital requirement of the SMEs portfolio. You can put all the firms in the

corporate category and use similar rating classes as used in Altman and Sabato, (2007) Table 12 5-25 million euro.

 

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