Page 43 - Azerbaijan State University of Economics

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

Basel II standards primarily aim to define what the banks' business criteria are.
According to the current purpose, it implements what operations, how and how these
banks will do through the existing standards, and tries to eliminate changes such as
different work criteria in different banks. As a result of Basel II standards, banks use
their existing capital more carefully and efficiently (Nurchin and Akchakanat, 2020).

In general, banks operate as a system in which capital demand and supply are matched
in the market. For this reason, they occupy a very important place in the economy. The
occurrence of any event that causes a downward movement in banks affects both the
operational efficiency and the negative movement of the country's economy in general.
Thus, Basel II standards aim to ensure capital adequacy in banks and to use the capital
used by banks in more efficient and less risky areas. If the risk ratio is high, the bank
should increase the capital ratio and be more careful in order to be least affected by this
risk. A strong discipline in repaying bank loans allows loans to be repaid on time, which
in turn can be channeled into new investments. According to this mechanism, bank costs
are reduced and the bank's current credit prices are lowered (Mathur and Skoglund,
2011).

According to Basel II standards, the real sector uses loans more efficiently. There is
no problem when real sector loans are used for healthy purposes. However, many
events in the past show that the loans received in this way are generally used for the
personal purposes of the entrepreneurs, not within the enterprise. In some cases, it is
seen that loans used for general consumption such as cars, yachts, and floors used in
these areas cause problems in repayment terms and lead to the end of the life of the
enterprise.

Thanks to the collateral system and rating applied through Basel II standards, the
chance of using such loans for consumer-oriented expenses is reduced, and a large
part of them is used for the needs of the enterprise. In this developed system, these
loan purchases, which are subject to certain standards, are checked not only during
the purchase process, but also until the loan repayment is completed.

With Basel II standards, capital initiatives in the banking system are accelerating and
interest rates are falling. The process of globalization that started in 1990 also
accelerated capital movements. Various countries were also affected by these capital
movements. Although in some cases the globalization of capital has caused crises of
regional or global impact, it has enabled many countries, especially countries with
low capital accumulation and export-oriented production, to find credit (Heid, 2007).

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