Introduction
The recent global financial crisis caused numerous serious problems around the world. Many countries like the United States, Spain and Greece suffered very heavy strikes during this financial crisis. The Australian banking system is no exception, has been impacted. Some financial institutions grasp this crisis into good opportunities, however other commercial banks are exposed to big challenge and face many risks like credit and liquidity risk. Given this situation, APRA outlines the regulations to ensure and consolidate the safety for Australian banking system, such as Liquidity and Credit quality. This report will analyse the difference between credit risk and liquidity risk at the beginning, then the regulations from APRA in terms of credit risk for the major and smaller banks will be discussed. Next, there will be 3 ratios of credit risk of the “big four” contrast to a major commercial bank in the UK. This report will be end with evaluating the credit risk of 5 major banks and give some findings are regarding with the credit risk of 5 banks.

1. Explain the difference between credit risk and liquidity risk for a bank.
1.1 Credit risk
Credit risk is the risk that the promised cash flows from loans and securities held by FIs may not be paid in full (Lange & Saunders, 2013). Normally, all financial institutions have probability to face this risk. However, if borrowed principal is paid on maturity and interest payments are paid on the due date, FIs can eliminate credit risk. Additionally, credit risk can be subdivided into firm-specific credit risk and systematic credit risk. Firm-specific credit risk affects a particular company and can be eliminated by good diversification, while systematic credit risk involves macroeconomic.

1.2 Liquidity risk
Liquidity risk is the risk that a sudden surge in liability withdrawals may leave an FI in a position of having to liquidate assets in a very short period of time and at low prices (Lange & Saunders, 2013). Banks usually hold less cash than bonds and shares since cash cannot earn interest and profit. Basically, liquidity risk always runs with systematic bank panics. Once a bank fails to meet their obligations and clients cannot withdraw cash, general public panics are spread and almost all depositors are eager for withdrawing their funds. On this occasion, banks can through inter-bank system to lend liquid funds from other banks. If the whole banking system is not able to raise enough liquid funds to satisfy depositors, this becomes an omen of liquidity problem.

1.3 Differences
1.3.1 Different side of the balance sheet
Credit risk is involves the asset side of balance sheet. Since loans and interests are the assets for banks, if credit risk occurs, banks will have problems with their asset side of balance sheet.

However, liquidity risk can arise in both liability and asset side of the balance sheet. For liability-side reason, if clients want to withdraw their deposits at the same time, banks may have difficulties to meet the obligations to satisfy depositors. For asset-side reason, loan commitment also causes liquidity risk. Loan commitment allows borrowers to withdraw funds at anytime during fixed period at a predetermined rate. However, banks never know the exact day when borrowers prefer to withdraw. If borrowers decide to withdraw in the same day, banks may face liquidity risk because of no liquid assets.

1.3.2 Risk-taker
Credit risk means banks cannot regain the principal and interest from borrowers. FI is the risk-taker and default triggers a total or partial loss of any amount lent to the counterparty (Bessis, 2010). As for liquidity risk, which often cause panic because the general public, saying depositors as risk-takers. Once liquidity risk occurs, banks have difficulties in raising funds to meet their obligations.

1.3.3 Source of risk
Credit risk means FI makes loans to borrowers because borrowers have good quality and credit rating. However, borrowers’ credit rating is deteriorating and they do not have enough funds to repay loans, thus, banks face credit risk and this risk comes from depositors default.
Liquidity risk involves the FI itself. “It is generated by the difference between the sizes of assets and liabilities, and the discrepancies between their maturities” (Bessis, 2002, p.119). If banks can manage assets size and maturities well, they can avoid facing liquidity risk.

1.3.4 Accompanying risks
Bessis (2010) believes credit risk splits up into default risk, migration risk, exposure risk, counterparty risk and recovery risk. Once credit risk occurs, borrowers may default, and their credit rating may decline. Moreover, there is a decline in the credit standing of the issuer of a bond or stock.

Liquidity risk often happens with funding risk. “Funding risk depends upon how risky the market perceives the issuer and its funding policy” (Bessis, 2012, p.31). Banks have high possibility to face liquidity risk if the cost of funding becomes higher and higher.

2. Outline the regulation from APRA in regards to credit risk for the large major banks and contrast to the regulations for smaller bank.
Banks aim at profitability. Profitability generates risk-taking behaviour. In order to improve the safety of the banking industry, the regulatory framework must be set up and supervise the banking system (Hunt & Terry, 2012).

2.1 The Cooke Ratio and Credit rating grades
The cooke ratio is designed for credit risk. It is the ratios of capital to weighted assets. Normally, its minimum value is set at 8% (Bessis, 2010).
Credit rating grades is the grades of credit ratings to which external credit assessment institution ratings are mapped, and that correspond to relevant risk-weights (Prudential Standard APS 112, 2010). Obviously, credit rating grads are important for banks to control and estimate the exposure at default risk and credit risk. High credit quality usually has low default risk and credit risk, vice versa.

2.2 Internal Model: Internal Ratings-based Approach (IRB)
Internal Ratings-based Approach to capital requirements for credit risk can be defined as banks are allowed to use their own estimated risk parameters like probability of default and exposure at default to calculate regulatory capital. Not all the Australian banks can apply this method only if banks meet certain conditions and requirements that APRA give those banks authorities to use this approach. Normally, large-scale and major banks can get approval from APRA and can use their own inter risk measurement models to estimate credit risk.

2.3 Standardised Approach
For some small and medium banks, there is an alternative approach can be used. In this method, APRA established a model, which includes sections that solve interest rate risk, equity position risk etc. Moreover, the banks are required to apply risk-weights to its on-balance sheet assets and off-balance sheet, and these risk-weights come from credit rating grades.

3. Graph 3 ratios of credit risk of the 4 major banks and contrast to a major commercial banks in the UK (from 2006-2012).
Among these five banks, four of them belong to Australia and the HSBC Holdings Plc is British bank. The reason why I choose HSBC Holdings Plc is because this bank is a famous international financial institution and one of the largest banks around the world. So HSBC Holdings Plc is quite representative that can be compared with four Australian banks.

3.1 Net Loans/Total Assets (DATA 4032)

This diagram shows the ratio of net loans over total assets between five banks. The higher ratio means bank net loans occupied the larger proportion in total assets, which also can be regarded as high risk to face credit problem.

3.2 Loans Loss Reserves/Gross Loans (DATA 4001)

For this line graph, the higher ratio represents high credit risk. High loan loss reserves can be regarded as banks have high amount of non-performing loans, thus banks may face credit risk.

3.3 Impaired Loans/Gross Loans (DATA 4004)

This graph shows the ratio of impaired loans over gross loans. If banks have large amount of impaired loans, which means high credit risk banks may face.

4. Interpret the credit risk of the 5 major banks.
4.1 credit risk for Australian banks and HSBC Holdings Plc over 7 years
4.1.1 Net Loans/Total Assets
From the graph of net loans over total assets, Australian banks have quite high ratio around 70% and remain stable throughout 7 years. However, for HSBC Holdings Plc, the ratio is around 45% throughout 7 years. Apparently, Australian banks have large probability to face credit risk and HSBC Holdings Plc is much securer in terms of credit risk. For numerous loans and borrowers, Australian financial institutions do not have capability to find out the background of each loan and each borrower. Moreover, in recent years, the global economy is recovering from crisis gradually, however, many borrowers even some companies still have financial issues and they have difficulties to repay their loans. If banks have many clients have financial problems, then banks can face credit risk.

4.1.2 Loan Loss Reserves/Gross Loans
As for ratio of loan loss reserves/gross loans, the higher the ratio, and the more problematic the loans are. From year 2006 to 2008, Australian banks experienced a stable and quite low ratio, which means at that time, these banks had good control of credit risk. However, from 2008 to 2012, the ratio increased significantly. This ratio stands for during the financial crisis, Australian banking system had a tough period and high loans default, saying higher credit risk than before. Likewise, the HSBC Holdings Plc. also suffered impact during economic recession. From 2005 to 2010, HSBC Holdings Plc increased the amount of loans loss reserves and from 2010 to 2012, the bank had a noticeable decrease from 2.77% to 1.83%. In 2008, the global financial crisis occurred, in order to prevent credit risk, all these banks increased the amount of loan loss reserves to deal with non-performing loans and reduce risk. It also can be seen that the ratio for HSBC Holdings Plc’s is much higher than four Australian banks since HSBC Holding Plc serves more than 58 million customers and it is understandable that HSBC have much more loans and loan loss reserves than other four Australian banks. Apparently, as a bank serves global clients, HSBC must hold more reserves for loans loss because more loans means more chances to face non-performing loans and credit risk.

4.1.3 Impaired Loans/Gross Loans
Finally, the ratio of impaired loans over gross loans for Australia banks presents a moderate increase during 2006 to 2010, and then, most of these banks remained stable trends. However, HSBC Holdings Plc had a quite fluctuating line and the ratio is much higher than four Australian banks. This means HSBC Holdings Plc suffered more serious credit risk than Australian banks not only on the ordinary days but also financial crisis. However, after 2010, the situation was starting to brighten and credit risk decreased for macroeconomic turnaround.

4.2 Credit risk during Global Financial Crisis (GFC)
In 2008, GFC occurred was resulted by lenders in the US housing market and information asymmetries with funding market. In brief, most people have high credits so that they can borrow much money from banks as their housing loans and so on. However, these people do not have enough money to repay the principal and interests so that banks face serious credit risk.

4.2.1 Net loans
It can be seen from the first line graph that all five banks shrink their amount of net loans slightly since GFC happened, which is a good choice to avoid the credit risk. On the other hand, due to GFC, all banks are more prudent about every loan and borrower or the usage of funds so that can prevent non-performing loans and reduce the losses.

4.2.2 Loans Loss Reserves
The diagram shows an increase in loans loss reserves during 2006 to 2009 for all five banks, especially for HSBC Holdings Plc with a dramatic increase during that period. GFC brings many problem like many loans were defaulted and borrowers did not have enough fund to repay. Given this situation, banks raised the reserves for loans loss to deal unexpected default and credit risk. However, from 2010, all these five banks decided to lessen reserves for loans loss since the macroeconomics recovered from recession and loans could be repaid on time.

4.2.3 Impaired loans
A loan is impaired when it is not likely the lender will collect the full value of the loan because the creditworthiness of a borrower has fallen. Obviously, during GFC, many borrowers who have high credit quality might be influenced as well. That is why from year 2005 to 2010, the five banks experienced increasing trends in terms of impaired loans. However, from 2010 to 2012, Australian banks showed a stable and controllable trend. Nevertheless, HSBC Holdings Plc presented a rapid decrease within one year. It can be understood that international banks and large-scale banks will be suffered much more attacks from economic recession and financial crisis than those small and medium-scale banks.

5. Conclusion
In conclusion, in this report, the differences between credit risk and liquidity risk are discussed. From searching related information, the regulations from APRA in regards to credit risk are analysed as well as difference regulations in terms of different scale banks. Then, 3 graphs show the 3 ratios, which relevant with credit risk followed by detailed explanation for 3 line graphs. All in all, Australian banks have a good control of credit risk as well as HSBC Holdings Plc, which even experienced fluctuation during GFC, but as a famous international bank, HSBC Holdings Plc has fully preparation for any unexpected financial crisis and pull through the crisis safely.