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    Credit Assessment Processes and Basel II Accord
    (İstanbul Bilgi Üniversitesi, 2007) Cihangir, Nuran; Yazgan, Ege
    This study analyses the credit assessment processes of a specific financialinstitution in Turkey and compares the main drivers of corporate credit approvaldecisions with the parameters of Moody’s rating model for private companies,RiskCalc. The new “International Convergence of Capital Measurement and CapitalStandards” or Basel II is expected to bring new applications in terms of creditassessment processes to the banking sector. The latest Banking SectorDevelopment Report by the Banking Regulation and Supervision Agency (BRSA)suggests that Turkish Banks are still in the initial phases of implementation of BaselII, which tries to achieve global financial stability. Its effectiveness is debatedespecially after the result of the recent turbulence in the financial markets related tothe sub-prime mortgage crisis. Basel II –Standard Approach is expected to beapplied by the majority of the Turkish banking sector. This approach implies theutilisation of external rating institutions’ grades in the credit assessment processesof the financial institutions and requires that each borrower and facility should havea rating prior to the bank entering into a commitment to lend.To reach the underlined objectives of the study, firstly Basel II framework and itsapplication in Turkey in terms of credit assessment processes are presented.Secondly, in order to model the credit decision data of the financial institution -whether to accept a loan application or not- logit and probit regression models are introduced. Those models are among the most practiced methods and mentioned inthe Basel II framework as the best practices of the banks in their internal creditassessment and credit scoring processes.Even though not all the parameters for comparison with the model of Moody’s couldbe obtained, the results indicate that qualitative information and/or judgementplayed an important role in the credit approval decision of the analysed financialinstitution. This is because the main criteria applied by Moody’s, such as debt orleverage ratios, size variables, liquidity ratios were insignificant. Another maincriteria, profitability, was only significant in the logit regression. The industry(excluding textile) in which the company operated, played no significant role in thecredit decision, which is also not addressed in the model of Moody’s as aparameter. The industry binary variable “textile” was significant in both models.Therefore, the models provided a meaningful result about the selectivity of financialinstitutions to grant credit to the textile industry companies due to the recentdifficulties in the sector. Activity ratios, sales growth and audit quality are otherparameters utilised by Moody’s. Due to inexistence of appropriate data, thesemeasures are not included in this study. It is suggested by Moody’s that, the abovementioned ratios and criteria are to be used by the financial institutions. Therefore,with the Basel II implementation, it is expected that those parameters will become acriteria in their rating and credit decision models. Basel II-IRB (internal ratingsbased) Approach implementation will lead to similar models as those of ratingcompanies to be constructed internally by the financial institutions.