supply of loanable funds has also played an important part in the upsurge of financial risks. this surge, in combination with greater uncertainties, has caused much greater losses due to the materialization of financial risks. in the 1990s especially, such losses have frequently resulted from financial scandals. the recent collapse of ” long - term capital management ” has clearly shown that not even having nobel - prize winning managers can always reduce the risk. finally, one of the principal reasons for the increase in financial risks is to be found in the greater intensity of international competitiveness. credit risk in particular has become more complicated since the banking sectors of developed and emerging market countries began to compete in the same arena, and since the larger banks began to compete intensively against non - bank financial institutions. every one of these developments has fundamentally affected national and international banking systems. more effective risk management by banks and other financial institutions has become vital for preserving the financial stability of both domestic and international markets. the changes i have just described show that market participants and departments responsible for financial control, and also portfolio and other managers, are often unaware of some of the risks to which their institutions are exposed. for all these reasons, the sound measurement of financial risks and methods for their effective management have become an absolute necessity. it is also important to make regular announcement of information on which market participants can base sound decisions about a bank ’ s financial standing and risk structure. it is well known that markets have a natural disciplinary mechanism which rewards banks that manage their risks effectively and penalize banks that show themselves to be risky. everybody knows that the successful operation of this mechanism depends on the regular dissemination of information making banks and the banking system transparent and allows market participants to arrive at sound decisions. in an environment that is home to all these kinds of activity, the task of maintaining the stability of national and international banking systems has come to require new arrangements and dispositions in the banking sector. to lead the way for progress in this area, a committee was established, led by the bank for international settlement ( bis ) and made up of central banks and banking supervisors from several countries. almost all of the proposals that ultimately originated in the work of this ” basle committee ” have been adopted for the banking systems of many countries, even though the committee has no power to apply sanctions. one of the first accomplishments of the basle committee was a study of banks ’ capital adequacy. issued in 1988, under the title ” international convergence of capital

information technology. once the risk is identified, measuring it accurately is generally accepted as the next step in preventing it from happening. the rapid progress of information technology in recent years has brought new risk measurement models to aid in the measurement of market risk. the most widely accepted of these is the ” value - at - risk ” model, called ” var ” for short. var is the maximum loss that can occur in the value of a portfolio having a certain investment horizon under a certain probability. since it is a simple and clear - cut concept, the var model is widely used for measuring market risk. it permits comparison of the market risk of different investment instruments, so that portfolio performance can be evaluated in terms of the risk undertaken. especially for measuring market risk to determine capital adequacy, this model has become a necessity in many countries and financial institutions. another method widely used for measuring market risk is ” scenario analysis ”. scenario analysis is a technique used to see how the value of a portfolio would be affected by various probable changes in market conditions. a last widely used method for measuring risk is the ” stress test ” method. the stress test is used to estimate how the value of a portfolio would be affected by large, unexpected fluctuations in the markets, such as have been observed during the global crisis which is still with us. though similar to scenario analysis, the stress test mainly aims to predict the maximum value that would be lost by a portfolio under certain extraordinary market conditions. the success of this method depends on successfully predicting market conditions. now let me touch briefly on risk management in turkey ’ s banking sector. from the risk management standpoint, we are well supplied with well - developed methods for managing risk and supervising the risks that we do accept. as to the financial standing of turkey ’ s banking sector, turkish banks have achieved a level of financial and institutional development not to be underestimated. but besides these strengths, there are various threats to the well - being of the turkish banking sector which should be mentioned. turkish banks, are mostly exposed to credit risk, liquidity risk, interest rate risk, and foreign exchange risk. this is true even when there is no global crisis or macroeconomic risks stemming from political uncertainty. i should mention that all these different kinds of risk have been thoroughly monitored by the supervisory authorities, who put preventive measures in place before the effects of any problems that were found could threaten financial stability. under this regulatory system, the banks must submit annual, quarterly, and