Your boss has worked in banking for many years, and has specialised during his career in lending to large and medium-sized companies. He must attend a meeting in a few days' time to discuss the management of credit risk by commercial banks.

Although he has a great deal of experience in credit management, he knows little about some of the subjects that will be discussed. He is aware that you are studying banking practice and thinks you will be able to help him.

The meeting will have two sessions, one in the morning and one in the afternoon. In the morning, the subject for discussion will be centralised clearing of derivative transactions, and in the afternoon there will be talks about securitisation. He also understands that financial disintermediation will be included in the discussions.

In order to prepare himself for the meeting, he would like you to write a short report for him about some of these topics.

Required:

You are required to write a report that contains three main sections, as follows:

(a) A brief explanation of the nature of credit risk and counterparty risk, and the various ways in which these risks arise for a commercial bank.

 (b) A description of the nature of centralised clearing, and the reasons why centralised clearing can reduce credit risk. In describing centralised clearing, you should give an example of financial instruments or financial transactions for which central clearing is used.

 (c) An explanation of the difference between financial intermediation and financial disintermediation. This section of your report should also explain, giving your reasons, whether the securitisation of residential mortgages or corporate loans is an example of disintermediation.