Market risk management in banks and internal model applications

The banks are one of the most important instutitions for a country economy and any negative progress in this system can effect the whole economical structure of the country. As far as the banks keep on doing their activities, they face with lots of risks. Especially the cases which have been emerging last years make the operations more complicated and differantiate the risks that the banks faced with. The management of those risks become more hard and because of the bad management of this risks, the social and economical losts which can not be compensated are appeared.When it is evaluated from the point of banking, there are two main aims of risk management process. The first one is to increase the financial performance, whereas the second one is to avoid and prevent the risks which cause irrevocable losts. So, it is very important not to make a concession from one aim when to reach the other one.The market risk is one of the basic risks that the banks have to deal with. Market risk can be defined as the probability of loses which is caused by the price variations of the assets in bank?s trading portfolio and there are various methods to measure this risks.After the financial crisis in 2000 and 2001, authority in Turkey is more willing to apply Basel-I criterias which was known but not used up to that time. Banks began to use Standart Approach to calculate market risk according to the arrangements by BDDK in 2001 who is the authority mechanism for the banking sector. This method was thought as a temporary one and mentioned that banks will use this method until they have an internal model for market risk management.Banks started to work on developing internal models for market risk management and it goes on also nowadays. In our country, up to now no bank uses internal model for calculating minimum capital requirement for market risk.By using this internal models, measuring will be more accurate and more exact ifnormation will be given to top management. And also regulatory capital requirement for market risk must be calculated according to the outputs of the internal model. Therefore, for the risk managers of banks determining the model and the parameters which will be used to calculate market risk becomes a very important task.Key Words1.Market Risk Management2.Value At Risk3.Variance-Covariance Method4.Historical Simulation5.Monte Carlo Simulation