How Dangerous is the Counterparty Risk of OTC Derivatives in Turkey?
AbstractRecent developments in Turkish derivatives markets demonstrate the increasing importance of risk management not only for individual banks but also for the entire system. In this context, this study analyzes the counterparty credit risk of OTC derivatives. The analysis is based on a hypothetical portfolio that is characterized by key aspects of the instruments banks hold. Thus, the portfolio consists of vanilla swaps, which dominate banks’ transactions. By simulating market risk factors, we come up with proxy risk exposure figures for the whole banking system. After a proper adjustment, these figures have been compared with the risk weighted assets, which includes credit risk,as well as with the capital. Consequently, we observe that the counterparty credit risk resulting from the use of OTC derivatives is relatively small for the Turkish banking system. Nevertheless, in light of the new regulatory framework introduced by Basel III, the importance of credit and market liquidity risk for the OTC instruments in trading portfolios is expected to increase in the near future.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 40600.
Date of creation: 08 Aug 2012
Date of revision:
Publication status: Published in Capital Market Journal 10.2(2012): pp. 70-79
Counterparty credit risk; OTC derivatives; swaps; Basel II; valuation;
Find related papers by JEL classification:
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-08-23 (All new papers)
- NEP-ARA-2012-08-23 (MENA - Middle East & North Africa)
- NEP-RMG-2012-08-23 (Risk Management)
You can help add them by filling out this form.
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