Ziraat Bankası 2012 Annual Report

Risk Management Policies Adhered to According to Types of Risk

Risk management activities at the Bank are conducted under the Risk Management Guidelines approved by the Board of Directors decision no. 7-101, dated 21 March 2012. The fundamental approach to risk management is to achieve the best possible practices in risk management functions by inculcating a culture of risk-awareness throughout the Bank and by continuously improving both the system and the Bank’s human resources.

Risk management activities cover the primary headings of credit risk, market risk, operational risk, and balance sheet risks. Policy and implementation principles concerning the management of these risks are carried out in accordance with regulations on the basis of each type of risk, which are approved by the Board of Directors. Maximum attention is given to ensuring that the risk management activities that take place are conducted with the coordinated participation of all units that are involved in every activity associated with the risk categories.

In addition, the Bank undertakes capital adequacy assessment adopting the economic capital approach in order to determine the amount of shareholders’ equity that is aligned with the losses it might sustain due to its risk exposure, and the results are reported to the senior management.

Credit Risk

Credit risk management involves manifesting the Bank’s credit risk exposure, and defining, measuring, monitoring, controlling and reporting these risks.

With the Basel II requirements published on 28 June 2012, the parallel run carried out from 01 July 2011 to 30 June 2012 was terminated, and legal reporting process was initiated from 01 July 2012. Accordingly, the amount at credit risk that is calculated is reported to the BRSA monthly on solo basis and quarterly on consolidated basis.

The Bank established the Company Assessment Model so that related units can determine the creditworthiness of customers in the Commercial, Corporate and Entrepreneurial segments, and the Scoring Model for establishing the creditworthiness of its customers in the Retail segment. Validation is carried out to measure the accuracy and performance of these models using statistical methods. In order to allow the use of advanced measurement methods as well for calculating the amount at credit risk, work is carried out on the results of the said scoring models.

Credit risk limits, which are approved by the Board of Directors, have been determined on the basis of customer segments; these limits are monitored on a monthly basis and the risk-weighted assets that the Bank is able to carry on the basis of segments are restricted with these limits.

For tracking loan books and comparing their past performances, monthly vintage analysis is conducted for housing, general-purpose, commercial, agricultural and SME loans.

Work is underway to conduct scenario analysis/stress testing for the non-performing loan ratios.

Market Risk

With a view to revealing the market risks that the Bank may be exposed to, risk measuring and monitoring are carried out, whose results are taken into consideration in the Bank’s strategic decision-making process.

In market risk control, the market developments that affect the current values of the portfolio at market risk, which is determined in line with the Bank’s trading strategy, are monitored at least on a daily basis, and the impact of ordinary or extraordinary downward and upward moves in markets upon the portfolio are analyzed.

In order to be able to evaluate in advance the impact of adverse developments that will take place in the parameters affecting the Bank’s financial strength on the activities and on market risks, stress tests and scenario analyses are conducted.

In an attempt to prevent the Bank’s financial strength from being significantly affected by increased volatility in the markets in the performance of its day-to-day activities, signal values in the early warning system are monitored and risk levels are restricted with limits.

The amount at market risk to be included in the legal capital adequacy ratio is calculated and reported using the standardized method. Alignment with Basel II requirements has been achieved in calculations as of July 2012. The market risk is measured on a daily basis using the VaR-based internal method employed in addition to the standardized method, which has been assessed and endorsed for fitness within the frame of international best practices by an independent consultancy firm.

Operational Risk

Our Bank assesses operational risks with respect to their origins (e.g. personnel, process, system and external), and manages them in accordance with the BRSA regulations.

Operational risks that are realized across the Bank are monitored through the Operational Risk Loss Database. Legal capital requirement is calculated for operational risk using the basic indicator approach. Advanced measurement methods are used within the frame of internal capital analyses and economic capital is estimated for operational risk.

Our Bank initiated work to set up the integrated risk mainframe within the scope of COBIT. As of 2012, a database on Information Technology risks was created, by which the risks realized and actions taken are monitored.

Our Bank’s Business Continuity Plan has been revised in line with the Regulation on Banks’ Internal Systems published by the BRSA, and a “Business Impact Analysis” was conducted which evaluated the probable risks that may be caused by potential interruptions in operations and their potential impacts.

To ensure continuity of services obtained from companies to which support services are outsourced, the Bank started assessing the risks that might arise from service procurement within the scope of the Regulation on the Outsourcing of Support Services by Banks published by the BRSA. In this frame, the Risk Management Program has been prepared and enforced. Risk analysis reports have been produced on the support services outsourced by our Bank.

An Operational Risk Map has been prepared for use in the Internal Control audit program for the purpose of establishing the risk levels of the Bank’s branches.

Balance Sheet Risks

To reveal the liquidity risk and the interest rate risks arising from banking accounts that the Bank may be exposed to, risk measuring and monitoring are carried out, whose results are taken into consideration in the Bank’s strategic decision-making process.

Liquidity risk control involves monitoring the maturity mismatches between funds and placements; following-up cash and cash-equivalent primary liquid reserve levels that will allow the Bank to pursue its normal day-to-day activities as well as CBRT liquidity facilities that can be used for fulfilling unexpected liquidity needs and secondary reserves that have the potential to be liquidated with low price risk; monitoring borrowing facilities from organized markets and thus, tracking free capital level. In addition, scenario and sensitivity analyses are carried out in this frame.

In interest rate risk control arising from banking accounts, analyses and monitoring are carried out for ratio and maturity mismatches between fixed and variable interest rate funds and placements; behavioral, as well as contractual maturities of assets and liabilities, and the effects of probable downward and upward, ordinary and extraordinary interest rate changes on the interest rate and on the current value of assets and liabilities. Also, Turkish lira and foreign currency interest margins created are watched closely.

With a view to being able to evaluate in advance the impact of adverse developments that will take place in the parameters affecting the Bank’s financial strength on the activities and balance sheet risks, stress tests are conducted.

In order to prevent our financial strength from being significantly affected by increased volatility in the markets and potential mismatches in cash inflows and outflows in the performance of our day-to-day activities, signal values in the early warning system are monitored and risk levels are restricted with limits.