Credit Risk Management In The Financial Markets

Submitted By baxtyler
Words: 7482
Pages: 30

Journal of Applied Finance & Banking, vol. 4, no. 4, 2014, 107-125
ISSN: 1792-6580 (print version), 1792-6599 (online)
Scienpress Ltd, 2014

Credit Risk Management in the Financial Markets
Mehmet Nar 1

Abstract
The main task of the financial system is to ensure the flow of resources from sectors with an excess of funds to those with a gap in funds. The developments of the past twenty years in particular, have paved the way for new turnovers in the field of finance and with the globalization phenomenon, foreign capital flows are transported rapidly to the farthest corners of the world. In addition, more complex market structures emerge on the agenda as well as complex financial tools and crises and their impact becomes more permanent.
Taking into consideration the dimensions global financial markets have reached, it is evident that problems occurring from the inefficiency of financial risk management have continued to grow. The search for a solution to ‘risk management in the financial markets’
- and particularly ‘credit risk management’ and its application - has gained importance.
With reference to these determinants, our study focuses on ‘credit risk’ and ‘management’ and while the Basel III standards are the topic of discussion in terms of risk activities for the banking sector, an inquiry is made into how effective the models and arrangements put forth to prevent risk are.
JEL classification numbers: G18, G32, F30.
Keywords: financial markets, risk management, credit, derivatives markets, Basel standards. 1 Financial Markets
Markets are places where buying and selling procedures are carried out and explained as based on a consensual exchange of goods and services (Hahnel, 2002). Financial markets are mechanisms which enable the realization of capital and credit in the economy. At this point, the financial markets separate into both money and capital markets. While the
Money markets comprise short term loans, the capital markets represent long term debt instruments. The stock market, bond market, commodity market, foreign exchange markets are all examples of the financial markets (Downes & Goodman, 1998).
1

Artvin Çoruh University, Türkiye. Assistant Professor, Faculty of Economics and Administrative
Sciences, Department of Economics.
Article Info: Received : March 25, 2014. Revised : April 28, 2014.
Published online : July 1, 2014

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Mehmet Nar

Figure 1 below, depicts the classification of the market structures. Accordingly, the capital markets consist of two types of elements: the primary and the secondary. The first element named as the primary market, consists of the money collection process of private or corporate organizations such as commercial companies, state organizations or nongovernmental organizations (NGOs). In other words, the primary market consists of securities issued by private or legal institutions and markets where account owners realize first-hand procurement. The secondary market consists of buying and selling of shares, bonds, and securities between investors after the initial sale (Williams, 2011).
The basic financial activity on the primary markets, where the financial instruments meet their buyers for the first time, consists of short or usually long term debt securities undertaken by investment banks or underwriters and puts equity capital instruments on the market. Investment banks do not execute banking activities in the sense that we perceive banking activities. These organizations may engage in underwriting without any risks or may prefer to buy the financial entities from the disposing company and sell them to investors on a subsequent market. On the other hand, the existence of various trading venues enabling the repeated buying and selling of financial entities on the secondary market is extremely important. This trade is carried out in (i) organized stock markets (ii) over the counter markets through a computer network and telephone connections or (iii) the shadow markets…