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How Dangerous is the Counterparty Risk of OTC Derivatives in Turkey?

Author

Listed:
  • D. Yıldırım, Burcu
  • Coskun, Yener
  • Caglar, Ozan
  • Yıldırak, Kasırga

Abstract

Recent 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.

Suggested Citation

  • D. Yıldırım, Burcu & Coskun, Yener & Caglar, Ozan & Yıldırak, Kasırga, 2012. "How Dangerous is the Counterparty Risk of OTC Derivatives in Turkey?," MPRA Paper 40600, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:40600
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    File URL: https://mpra.ub.uni-muenchen.de/40600/1/MPRA_paper_40600.pdf
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    References listed on IDEAS

    as
    1. Daniel Heller & Nicholas Vause, 2012. "Collateral requirements for mandatory central clearing of over-the-counter derivatives," BIS Working Papers 373, Bank for International Settlements.
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    More about this item

    Keywords

    Counterparty credit risk; OTC derivatives; swaps; Basel II; valuation;

    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

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