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RISK MANAGEMENT POLICIES ACCORDING TO VARIOUS TYPES OF RISKS

Interest Rate Risk
Interest rate risk involves possible losses a bank may incur due to fluctuations and volatility in interest rates, depending on its portfolio positions. At TEB, the Assets and Liabilities Committee manages interest rate risk. The Assets and Liabilities Management Department within the Treasury Group thereupon implements the decisions taken by this committee
Protection against fluctuations in interest rates is a top priority for TEB. Interest rate risk is determined by measuring the rate of sensitivity of assets, liabilities and off-balance sheet items. TEB runs simulations of interest revenues according to estimated macroeconomic indicators. Duration, term and sensitivity analyses are conducted and these calculations are conveyed to the Assets and Liabilities Committee.

Interest rate risk is determined by measuring the rate of sensitivity of assets, liabilities and off-balance sheet items. TEB runs simulations of interest revenues according to estimated macroeconomic indicators. Duration, term and sensitivity analyses are conducted and these calculations are conveyed to the Assets and Liabilities Committee.

Possible negative effects of interest rate fluctuations on financial position and cash flow are minimized by means of prompt decisions. The management monitors interest rate movements on a daily basis and makes changes whenever necessary in deposit and loan rates.

When determining short, medium and long-term pricing strategies, TEB’s Assets and Liabilities Committee manages maturity incongruity and adopts the principle of working with positive balance sheet margins as its pricing policy.

Market Risk

Market risk involves possible losses a bank may incur as a result of the exposure of its balance sheet and off-balance sheet accounts to interest rate risk, equity position risk or exchange rate risk resulting from fluctuations in the financial markets, in interest rates, exchange rates or stock prices.

TEB’s Board of Directors ensures that the risk management units and senior management take the necessary steps to properly measure, monitor and manage its exposure to market risk.

The Board of Directors determines market risk limits and regularly revises these limits in accordance with market conditions and the strategies of TEB.

With regard to TEB’s daily transactions, stop-loss and transaction limits are defined for each product. The Board of Directors assigns limits for positions in derivatives and similar contracts. Transactions are carried out within these limits and the limits are monitored and reported daily.

The market risk of the Bank is calculated using a standard method and reported to legal authorities.

The market risk can influence the Value-at-Risk (VaR) figure, which is also calculated using various financial models. VaR figure is calculated using a variance/co-variance method on the basis of a 250-business-day data and a one-day holding period in a 99% confidence interval. Daily VaR figures are the main drivers of TEB’s internal reports and efforts to monitor market risk. Back testing is periodically performed to validate the accuracy of calculations and the methods used.

The VaR figures calculated by internal models to predict losses in the event of a crisis are also verified by scenario analyses and stress tests and are then reported to senior management and the Board of Directors.

Scenario analyses and stress tests involve the re-application of past crises to existing portfolios or the observation of likely losses due to interest and foreign exchange shocks.

Liquidity Risk

Liquidity risk is defined as the risk of failing to fully meet cash obligations in due time, because the bank in question does not possess sufficient cash or is not able to generate cash when needed, which might result from mismatches between TEB’s cash inflows and outflows.

Liquidity risk also includes the risk of loss that may arise when there is an inability to enter or exit the market as needed. When it is not possible for a bank to adequately close positions at favorable prices and at sufficient amounts or as rapidly as required, the lack of sufficient cash may translate into losses.

TEB’s policies focus on maintaining the quality of its asset structure, so that liquid assets can meet all obligations. Striving to be one of the most liquid banks in the industry is of utmost importance to TEB. The Board of Directors regularly monitors and determines liquidity ratios and the relevant standards for maintaining high liquidity at all times.

TEB has in place an effective management reporting system for the timely reporting of the liquidity position to the Board of Directors, senior management and all related units. Cash flow analyses are carried out for different maturity structures and currency units. Maturity mismatches are monitored and concentrations in funding sources are closely monitored.

As a matter of general policy, consistency in maturities and interest rates is maintained in line with Assets and Liabilities Management at all times, and balance sheet positions of TRY and returns on foreign currency mix are continuously managed in the positive.

With regard to the sources of funding and liquidity, it is observed that while the greater part of the liquidity requirement of TEB is met by deposits, syndicated loans and pre-financing products are also used at times to obtain funds in addition to deposits.

TEB strictly adheres to the policy of maintaining high-quality liquid assets in sufficient amounts. This assures a regular cash flows and strong liquidity position at all times and enables the Bank to be a net lender to the market.

Exchange Rate Risk

Exchange rate risk is defined as a possible loss that a bank may incur with all of its currency assets and liabilities in the event of changes in exchange rates.

In calculating capital adequacy that underlies exchange rate risk risk weighted assets are calculated and reported with the standard method. While doing this TEB takes into account all of its foreign-currency assets, liabilities and forward foreign-currency contracts.

Within the limits approved by the Board of Directors, the Treasury Group is responsible for the management of price, liquidity and fulfillment risk arising from fluctuations in local or foreign currency prices in domestic and international markets. Money market risks and risk-bearing transactions are monitored on a daily basis and reported weekly to TEB’s Assets and Liabilities Committee.

Position limits determined by the Board of Directors are monitored on a daily basis and possible changes in the Bank’s monetary positions that may come about as a result of routine foreign currency transactions are also examined.

Position limits determined by the Board of Directors are reported on a daily basis. As a part of the Bank’s risk management strategy, every type of borrowings in foreign currency is protected against exchange rate risk by derivative products.

Equity interests held in foreign companies are protected against exchange rate risk along the lines of the TEB’s overall strategy.

Credit Risk

Credit risk is the loss that may be incurred if the other party of the loan relationship fails, partially or entirely, to fulfill its obligations on time.

One of the most prominent characteristics at TEB that distinguishes it from the competition is its prudent lending policy and solid asset structure that go hand in hand with a stable growth strategy.

The Board of Directors has the final authority in the allocation of loan facilities. This power is delegated to the Credit Committee and the General Manager on certain conditions. The exercise of these delegated powers are regularly monitored and reported by the internal audit and risk management units. Loans are extended within the limits defined for each debtor and group of debtors individually. Every customer that performs a transaction on credit must have a loan facility allocated by the relevant authorities and customers are systematically prevented from exceeding those limits.

Branch officers visit loan applicants and obtain financial statements and information related to the potential customer’s activities and plans. A loan proposal is prepared containing a commentary on the company’s financial position, an industry analysis, information about the partners and managers, as well as references from other banks and companies with which the applicant is doing business. This information is then submitted to the Credit Allocation and Financial Analysis Group, which assesses the applicant’s creditworthiness and sends its report to the Credit Committee for approval.

In assessing customers, TEB uses an internally developed rating system, which takes into account both financial and non-financial criteria. The rating of the collateral proposed for the loan is also calculated using a system developed by TEB. In accordance with the Bank’s lending policy, overall credit risk is assessed through both debtor and collateral ratings.

Developments in the marketplace are closely monitored to minimize credit risk and industry limits are applied. As a result of the prudent policy the Bank adopts, the maximum amount of loan that can be granted to a customer is kept below legal limits, thus minimizing the risk of loan concentration. Limits set by the Board of Directors are regularly monitored and reported.

The Risk Management Group, in collaboration with the Credits and Financial Analysis Group, makes assessments of the loan portfolio for the Board of Directors and the Board of Internal Auditors and reports high-risk cases and non-performing loans.

The Credit Monitoring and Legal Proceedings Department is structured under the supervision of the General Manager. This Department submits regular reports to the Credit Committee and also to the Board of Directors via the Board of Internal Auditors. After a loan facility is offered, the Credit Monitoring Department monitors the customer’s repayment capability and the sufficiency and adequacy of the collateral. In this way, any problematic loan is identified at an early stage. Should the credit rating and/or the quality of the collateral raise any doubts, the customer will then be closely reviewed and additional collateral shall be requested.

Limits related to counter party risk arising from treasury transactions or from customer-based commercial transactions are monitored on a daily basis. Daily controls are also performed on the limits that have been offered to correspondent banks in accordance with their ratings and the maximum risk that the Bank is able to bear with its own capital.

Country risk involves the likelihood of partial or complete failure of the debtor person or company in international loan transactions to fulfill obligations on time, due to economic, political or social incidents taking place in the relevant country.

TEB exclusively enters into loan transactions with foreign financial institutions or countries that are rated investment grade by international rating agencies. For this reason, possible risks in such transactions do not pose an important threat for the Bank, given its current financial structure.

Operational Risk

Operational risk is defined as the risk of loss that may result from inappropriate or malfunctioning practices, or from human and system errors or external reasons.

Operational risk can occur along the entire spectrum of banking activities as a result of human and system errors or inappropriate practices. It also includes the risk of loss resulting from mistakes and negligence, internal or external fraud and natural disasters.

TEB’s main objectives in this regard are to achieve total compliance with internal rules, to develop a strong internal control culture and to attain all the qualitative standards determined by the Basel Committee.

Compliance with legal requirements, adherence to the ethical values of the banking profession, information security, prevention of internal and external fraud, contingency and business continuity plans and “know-your-customer” policies are all fundamental controls for the reduction of operational risk.

By taking into consideration the risk caused by lack of information about the legislation, TEB has undertaken an organizational restructuring effort in the areas of taxation and banking legislation and strengthened its decision support functions with high-quality staff. The project of gathering and managing operational risk loss data became operational in 2007, and with this project, TEB aims to be one of the banks in the industry that is most prepared for Basel II in terms of operational risk.