Credit risk modeling within basel II framework

In this study it is aimed to explain credit risk concept within Basel II framework and to investigate the effect of transition to Basel II on both banks and real sector firms. After a breaf introduction in the first part, in the second part, literature survey related with the study and, meaning and importance of credit risk within Basel II framework are explained. In the third part, conceptual approaches of credit risk modelling is summarised, and then a structural model (Basic Merton) and a reduced-form model (Hull-White) are examined in detail and explained in theoretical basis. Then, current practices are summerized comperatively and it will be shared some of the notable conclusions that includes some comments on the new approach in credit risk process and Basel II transition of local banks and its effect to the banks and to the real sector. After reviewing the models, some credit risk parameters for IMKB-100 firms are tried to be defined under proposed approach based on Merton model. In the fourth part, the results of the case study performed on real historical data of a car finance company are explained. Regarding the calculation of credit risk amount of retail loans, the current application in calculating credit risk in banks are investigated via researches and interviews. With further research on the current applications on retail loans, a company?s expected credit loss amount for the 2006 year-end is calculated. Following parts will introduce and give explanation on Incurredbut- not-recognized (?IBNR?) loss which is one of the most popular concept among credit risk managers. IBNR concept will be compared with Basel II required credit risk understanding. The study is finalised by conclusions and recommendations part. Key Words : Credit Risk Modeling, IBNR, Basel II