How Dangerous is the Counterparty Risk of OTC Derivatives in Turkey?

Burcu D. Yıldırım, Yener Coskun (), Ozan Caglar and Kasırga Yıldırak

MPRA Paper from University Library of Munich, Germany

Abstract: Recent developments in Turkish derivatives markets demonstrate the increasing importance of risk management not only for individual banks but also for the entire system. In this context, this study analyzes the counterparty credit risk of OTC derivatives. The analysis is based on a hypothetical portfolio that is characterized by key aspects of the instruments banks hold. Thus, the portfolio consists of vanilla swaps, which dominate banks’ transactions. By simulating market risk factors, we come up with proxy risk exposure figures for the whole banking system. After a proper adjustment, these figures have been compared with the risk weighted assets, which includes credit risk,as well as with the capital. Consequently, we observe that the counterparty credit risk resulting from the use of OTC derivatives is relatively small for the Turkish banking system. Nevertheless, in light of the new regulatory framework introduced by Basel III, the importance of credit and market liquidity risk for the OTC instruments in trading portfolios is expected to increase in the near future.

Keywords: Counterparty credit risk; OTC derivatives; swaps; Basel II; valuation (search for similar items in EconPapers)
JEL-codes: C15 E44 G21 G32 (search for similar items in EconPapers)
Date: 2012-08-08
New Economics Papers: this item is included in nep-ara and nep-rmg
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Published in Capital Market Journal 10.2(2012): pp. 70-79

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