Page 41 - Azerbaijan State University of Economics

THE JOURNAL OF ECONOMIC SCIENCES: THEORY AND PRACTICE, V.79, # 2, 2022, pp. 37-50

With the Basel-1 criteria, the basic criteria that banks must comply with in order to
increase their resilience against crises and financial fragility and to ensure financial
stability have been determined. The Basel-1 criteria recommend that banks apply
certain principles while giving loans and that their risk-taking coefficients should not
exceed a certain value. At the same time, international standards have been set in the
capital adequacy of banks to ensure these. Accordingly, a lower limit of 8% was
imposed on the ratio of capital to risk-weighted assets. While the bank allocates a
resource to a certain use, it has to hold 8 units of capital for every 100 units it creates
while allocating cash or non-cash risk. In other words, the bank or credit institution
that will give the loan will be able to take a risk up to 12.5 times the capital. In this
case, banks or credit institutions that have to allocate new loans will have to increase
their capital if they have completed the risk coefficient. This obligation will naturally
be reflected to the customer as a new loan cost. In this sense, the Basel-1 criteria have
linked risk measurement to a single measure. This situation was insufficient in a short
time and it was inevitable to change it.

Probably because it is a beginning, Basel - 1 criteria consists of the above mentioned
in summary. It has not been possible to apply these fundamental principles for a long
time, due to the fact that risk management adheres to a single measure, is
predominantly capital-focused, and does not provide diversity in the classification and
lending of enterprises. As a matter of fact, the Basel - I criteria accepted in 1988 were
replaced by the Basel - II criteria in 2004 (Arslan, 2007).

BASEL II STANDARDS
The Basel-II Accord has better matched risks to regulatory equity needs, built a more
comprehensive approach taking into account developments in risk measurement and
management, continued to support the security and soundness of the financial system
and facilitate competitive equality, and focused on international banks with a diverse
level of complexity.

The Basel - II text was published in 2004 as a result of a five-year consultation
process, updated in 2005 with the issues related to trading activities and double
default effects, and the comprehensive version was published in June 2006. Basel -
II envisages national implementation preferences left to the initiatives of countries,
rather than a one-size-fits-all approach. In this respect, the effectiveness of Basel - II
applications will be ensured by the countries' ability to determine their preferences
in line with their national conditions.

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