ANNUAL REPORT 2011
INTRODUCTION
MANAGEMENT AND CORPORATE GOVERNANCE PRACTICES
FINANCIAL INFORMATION AND RISK MANAGEMENT
ANNUAL REPORT (PDF)
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. 377, dated 27 November 2007. 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 each category of risk.
Risk management policy is concerned with the execution of measurement, monitoring, stress testing and scenario analyses of credit risk, operational risk, market and balance sheet risks which are aligned with the volume, nature and complexity of the Bank’s activities, and reporting the results therefrom. New products are considered within the frame of risk management activities.
Results of risk analyses and risk indicators are reported in varying scope and extent to the Board of Directors, Audit Committee, executive units and internal system units at semi-annual, monthly, weekly and daily intervals.
The Bank places utmost importance on acquiring expertise in the field of risk management; in this vein, the activities are being carried out by the Risk Analyst Group career professional staff. Employees assigned with risk management are encouraged to earn FRM (Financial Risk Manager) certification awarded by GARP (Global Association of Risk Professionals) and the number of certified employees grows by the year.
Credit Risk
Within the frame of credit risk management, end-of-month amount at credit risk is calculated using the standardized method under Basel II requirements published by the BRSA in March 2011, and the results are reported to the BRSA. Calculations subject to Basel II requirements, which were implemented in parallel with Basel I requirements from 01 July 2011 and 30 June 2012 based on the BRSA decision dated 24 February 2011, are revised as necessary upon new announcements made from time to time by the BRSA. 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 rating/scoring models used for different loan portfolios.
Operational Risk
The Bank acknowledges that operational risk management is a process encompassing all activities and personnel. When fulfilling their duties, authorities and responsibilities, it is essential that the Bank personnel are aware of operational risks and consider their ramifications, take necessary precautions for mitigation and/or prevention of these risks or come up with proposals to this end, and carry out their activities with an awareness of control. The Bank’s operations are evaluated with respect to operational risks arising from the personnel, processes, system and external factors.
Operational risk loss database uses the lines of business and types of losses identified under Basel II. Data on operational risk losses that occur throughout the Bank are monitored through the system as and when they are recognized in the accounts. Pursuant to the Regulation on the Measurement and Evaluation of Capital Adequacy of Banks, legal capital requirement is calculated for operational risk, as well as for credit risk and market 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. The calculations employ the Monte Carlo Simulation within the scope of the Loss Distribution Approach. Efforts are ongoing to develop advanced measurement methods required to be used by banks offering service on a global scale within the framework of Basel II Accord.
Self-assessments were conducted by way of meetings held at Regional Offices and face-to-face interviews with employees for on-site identification of risks. The meetings were completed in June 2011, and the report issued was shared with related units.
Under the Information Systems Risk Management activities, the Business Continuity Plan has been developed in coordination with the concerned units in keeping with the BRSA regulation in force, the Contingency Plan in place has been revised, and the two plans were merged to produce the “Ziraat Bank Business Continuity and Contingency Plan”. Training sessions regarding the plan was organized to raise awareness of the personnel and the plan has been distributed in hard copy to all Bank units.
Operational Risk Map 2011 has been formulated to establish the risk levels of the Bank’s branches for use in the creation of the Internal Control audit program.
Work is in progress relating to the risk exposure evaluation of the companies from which the Bank obtains support services, within the frame of the BRSA’s applicable regulations concerning banks’ outsourced support services.
Efforts are ongoing to achieve compliance with the draft regulations published in line with Basel II requirements based on the BRSA decision numbered 4099.
Market and Balance Sheet Risks
With a view to revealing the market and balance sheet 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 Bank’s accounts and positions exposed to market risk and the developments that affect the present values thereof are monitored at least on a daily basis, as well as analyzing the impact of ordinary or extraordinary downward and upward moves in markets upon the Bank’s accounts and positions exposed to market risk.
In liquidity risk control, maturity mismatches between funds and placements are monitored, as well as their concentration levels, while also following-up cash and cash-equivalent primary liquid reserve levels and free capital levels that will allow the Bank to pursue its normal day-to-day activities.
In structural interest rate risk control, analyses and monitoring are carried out for maturity mismatches between fixed and variable interest rate funds and utilizations, 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.
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 market and balance sheet risks, stress tests are conducted and their results are used in the Bank’s strategic decision-making process.
In an attempt to prevent the Bank’s financial strength from being significantly affected by increased volatility in the markets and potential mismatches in cash inflows and outflows 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.
In this frame, the Bank calculates and reports the amount at market risk to be included in the legal capital adequacy ratio using standardized method. In addition to that, the Bank started reporting the amount at market risk that is calculated in line with Basel II requirements to the BRSA for information. VaR-based internal method employed in addition to the standardized method for measuring market risk has been assessed, and endorsed for fitness, within the frame of international best practices by an independent consultancy firm.
As per the Capital Markets Board of Turkey decision 35/1012 dated 28 September 2007, price verification is performed once in every fifteen days for over-the-counter options contracts that take place within the Principal Guaranteed Funds.
For liquidity risk measurement, liquidity gap, structural liquidity gap, average maturity, and deposit renewal analyses and liquidity stress testing are conducted. Repricing gap, duration, convexity, net interest margin/income and net present value of banking book change for standardized interest rate shock analyses are performed for structural interest rate risk measurement.
Within the frame of risk management activities, global and national developments are tracked via time-series, and efforts are taken on to estimate economic and financial indicators used in risk management on the basis of econometric models, while work is carried out on “Economic Capital” projections that cover basic risks, as part of the internal capital adequacy assessment process.