Page 40 - Azerbaijan State University of Economics

Nigar Huseynlı: Basel Standards And Theır Applıcatıon

Assets associated with this asset class; Cash is classified according to risk levels,

ranging from risk-free assets such as sovereign and central bank banks and debt to 100%

risky assets such as OECD sovereign debt. Assets such as private sector debt, non-
OECD bank debt for one year, real estate, buildings and equipment, and equity
instruments issued by other banks are included in the adjustments. In addition, off-
balance sheet items such as unused liabilities, letters of credit and derivatives are also
taken into account in the calculation of RWA (Liebig et al. 2007).

Over time, with the complexity of markets, Basel-I standards have remained
insufficient. In this process, criticism against the Basel I standards began to grow. In
addition to the credit risk managed in Basel I standards, the concepts of market risk
and operational risk are also included in Bank risks in this process. To revise the Basel
I standards, market risk related to the calculation of capital adequacy was included in
a document called Market Risk Adjustment published in 1996. However, the initial
consensus was more risk-sensitive (Kupiec, 2007).

The capital adequacy regulation announced to the international platform by the Basel
Committee has made the systems applied with different norms in many countries
uniform and market risk calculation was included in the said regulation in 1996. This
regulation, called the Basel-1 regulation, has been accepted by the supervisory
authorities of many countries, especially the G-10 countries, and is currently in
practice in more than 100 countries.

Basel - 1 (Capital Adequacy Accord) has helped to strengthen the soundness and
stability of the International banking system and to improve competition among
internationally active banks. However, financial markets have developed significantly
over time and the world financial system has been exposed to economic turbulence to
a considerable extent. Also Basel - 1; Banks did not fully reflect their risk levels, could
not prevent arbitrage that may occur due to the differences created by the regulation,
did not include some risks such as operational risk, and due to the inequality of
competition caused by the OECD country criterion, it was insufficient to have
sufficient capital and risk management in banks or to ensure the confidence and
soundness of the banking system, and There was a need for a new regulation.

The most basic principle of Basel-1 criteria is to determine the capital requirement of
the customer to be loaned in terms of credit risk, according to the criteria of being an
OECD country or not. In lending, the principle of providing credit facilities in favor
of OECD countries has been valid.

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