Credit risk measurment and rating in the framework of financial crisis theories and Basel II

In June 2004, Central bank governors and the heads of bank supervisory authorities in the Group of Ten (G10) countries formally endorsed Basel II, the International Convergence of Capital Measurement and Capital Standards: a Revised Framework.Basel II provides guidelines for institutions to assess their capital adequacy, for regulators to review such assessments and for the investment community to improve market discipline as a result of increased financial institution transparency. Basel II includes three mutually reinforcing pillars, which together should contribute to safety and soundness in the financial system:Pillar 1: Minimum Capital Requirement: this covers market, credit and operational risk.Pillar 2: Supervisory Review Process: this sets the framework for supervision. Supervisors will be able to hold additional capital against risks not covered by Pillar 1.Pillar 3: Market Discipline: this sets out the framework for market disclosures by banks and financial institutions.Basel II provides for three compliance frameworks based on the business model of the bank. Smaller, less-complex banks will be encouraged to follow the Standardized Approach that is very similar to the existing Basel I rules. Larger and more complex banks will be encouraged to adopt an Internal Ratings Based (IRB) Approach that directly links a bank?s risk ratings with its regulatory capital requirements. The IRB Approach is further sub-divided into Foundation and Advanced approaches.In general most important affect of Basel II is probably will be seen on credit risk that international banks faces. It is expected that Basel II, will reduce the level of credit risk, increase market transparency, ensure banks more compact and solid risk understanding.Since Basel II regulations are a part of European Union Law via CAD 3, to apply these regulations is more important for Turkey which aims to be a member state of EU.In our thesis in the framework of financial crisis theories and Basel II risk and credit risk terms are explained, credit risk evaluation methods are examined, concepts of Basel II are given in detailed and considerations about Basel II?s probable affects on our country are debated.Key Words:1.Credit Risk2.Basel I3.Basel II4.Rating5.Financial Crisis6.Risk Measurment Methods