2014 Annual Report

Risk Management Policies in Accordance with 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 and Internal Capital Adequacy Assessment Process of the Banks”, 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 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, Liquidity Adequacy Report is started to be submitted to BRSA 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.

Statutory reports are prepared by using standard approach method within the framework of Regulation on Measuring and Assessing Banks Capital Adequacy. Within this scope, the amount of credit risk which is calculated is reported to the BRSA monthly on a solo basis and quarterly on a consolidated basis. Leverage ratio is submitted to BRSA and CBRT periodically.

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.

Within the scope of Internal Rating Notification Circular which is enacted as of January 2014, Internal Rating Notifications are reported to the Banks Association of Turkey’s Risk Center on a monthly basis. Several projects are planned to enable to calculate amount of credit risk with advanced measurement techniques.

Following credit risk limits and signal values that are approved by the Board of Directors are detected: credit risk limits and signal values on the basis of customers and counterparty credit risk stemmed from banking accounts on the basis of portfolio and counterparty credit risk limit and signal values stemmed from trading accounts. These limits and values are followed monthly. The Bank’s risk weighted assets that it can carry on the bases of segment and portfolio are restrained 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. Moreover, in order to measure the effectiveness of models that are used, backward test analyses have been conducted.

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 carries out works to set up the integrated risk mainframe. 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.

Within the scope of our Bank’s Business Continuity, 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.

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 within the scope of balance sheet risks management.

Compliance with statutorily-mandated ratios pertaining to the interest rate risk incurred on liquidity and banking institutional accounts is monitored. In addition, following items are monitored in liquidity risk control: maturity mismatch between funds and placements, behavioral maturities of assets and liabilities besides their contractual maturities, 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. 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 maturities 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.