Risk Management Policies in Accordance to Risk Type
The fundamental approach to risk management is to achieve the best possible practices in risk management functions by instilling 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 risk. Policy and implementation principles concerning the management of these risks are carried out in accordance with the regulations on the basis of each type of risk, which are approved by the Board of Directors. The utmost attention is taken to ensure that the risk management activities which take place are conducted with the coordinated participation of all units that are involved in every activity associated with the risk categories.
In order to establish a system to determine the capital level and the need for capital against the risks that the Bank is exposed to (or will be exposed to), an Internal Capital Adequacy Evaluation Process is established in our Bank, in line with strategic goals, within the framework of the “Regulation on the Internal Systems of the Banks”, which was enacted after publication in the Official Gazette, issue 28337, dated 28 June 2012. The analyses, which are in compliance with the implementation guidelines of the BRSA, are supported with stress testing and scenario analyses on a risk basis.
Under the scope of “Regulation on Equity of Banks”, “Regulation on Measurement and Evaluation of Leverage Level of Banks” and “Regulation on Capital Maintenance and Cyclical Capital Buffer”, which were enacted in 2013, studies are conducted in alignment with Basel III Regulations.
In accordance with the Basel-III liquidity implementations, a “liquidity coverage ratio quantitative impact study” is carried out in line with the “Regulation on Measurement and Evaluation of Liquidity Adequacy of Banks” which was published by the BRSA. Additionally, studies related to the Liquidity Coverage Ratio and Net Stable Funding Rate are delivered to the Basel Committee in 6-month periods through the BRSA.
Credit Risk
Credit risk management involves regulating the Bank’s credit risk exposure and defining, measuring, monitoring, controlling and reporting these risks.
The process of statutory reporting in compliance with the Basel II Standard Approach that began as of 1 July 2012 as prescribed by the Basel II rules published on 28 June 2012 continued in 2013 as well. Accordingly, the amount of credit risk which is calculated is reported to the BRSA monthly on a solo basis and quarterly on a consolidated basis.
The Bank established the Company Assessment Model so that related units are able to 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 also allow the use of advanced measurement methods to calculate the amount of 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.
Market Risk
With a view to revealing the market risks that the Bank may be exposed to, risk measuring and monitoring are carried out, the results of which are taken into consideration in the Bank’s strategic decision-making process.
In the market risk control process, the market developments that affect the current values of “portfolios subject to 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 the markets on the portfolio is analyzed.
In an attempt to prevent the Bank’s financial strength from being significantly affected by increased volatility in the markets in the course of its day-to-day activities, signal values in the early warning system are monitored and risk levels are restricted within limits.
The amount of market risk to be included in the legal capital adequacy ratio is calculated and reported by using the standardized method. 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 suitability within the framework of international best practices by an independent consultancy firm.
Operational Risk
Operational risks incurred throughout the Bank are tracked by means of the Operational Risk Loss Data Base. The amount of capital required to cover operational risks is calculated according to the Basic Indicator Approach.
Our Bank initiated work to set up the integrated risk mainframe within the scope of COBIT. A database of Information Technology risks was set up, through which the risks that were found and the actions taken to tackle them are monitored.
Our Bank’s Business Continuity Plan has been revised and a “Business Impact Analysis” was conducted which evaluated probable risks that could be caused by potential interruptions in operations and their potential impacts.
To ensure a 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.
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 measurement and monitoring are carried out, the results of which are taken into consideration in the Bank’s strategic decision-making process.
Compliance with statutorily-mandated ratios pertaining to the interest rate risk incurred on liquidity and banking institutional accounts is monitored. In addition, 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 to fulfill 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 levels. In addition, scenario and sensitivity analyses are carried out within this framework.
In interest rate risk control of banking accounts, analyses and monitoring are carried out on ratio and maturity mismatches between fixed and variable interest rate funds and placements, as well as in behavioral finance and contractual maturities of assets and liabilities, and into the effects that probable downward or upward changes in interest rates, either ordinary or extraordinary, will have on the current value of the assets or liabilities. Turkish lira and foreign currency interest margins are also watched closely.
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 during the course of our day-to-day activities, signal values in the early warning system are monitored and risk levels are restricted within limits.