Risk Management

Organizational Structure
The risk management governance at the Bank starts with the Board of Directors. Risk Committee, Asset Liability Committee (ALCO), Corporate and Retail Credit Policy Committees (CPC), Operational Risk Committee (ORC) and the Risk Management Department are the important bodies of the risk management structure.

The Board Risk Committee
The Board Risk Committee is composed of three designated members of the Board of Directors. The general manager, the Chief Risk Officer, Treasury Assistant General Manager and Credits Assistant General Manager also attend the Committee meetings.

The Risk Committee defines risk policies and strategies, reviews all types of risks Bank is exposed to in its monthly meetings, monitors the implementation of the risk management strategies and brings the important risk issues to the attention of the Board.

The Asset Liability Committee
Asset / Liability Committee (ALCO) is composed of the Chief Risk Officer, Treasury Assistant General Manager, Financial Control Assistant General Manager and International Affairs Assistant General Manager.

ALCO meets twice a month and responsible for executing the policies and managing structural interest rate risk and the liquidity risk within the limits defined by Board of Directors.

The Corporate Credit Policy Committee
Corporate Credit Policies Committee is composed of the Vice Chairman of the Board of Directors, the General Manager, the Chief Risk Officer and Credit Assistant General Manager. Committee meets monthly and is responsible for continuously controlling quality of bank’s non-retail credit portfolio and determining the relevant policies for granting loans in a perspective that would maximize bank’s profitability in a risk-return framework.

The Retail Credit Policy Committee
Retail Credit Policies Committee is composed of the Vice Chairman of the Board of Directors, the General Manager, the Chief Risk Officer and Credit Assistant General Manager and Retail Assistant General Manager. Committee meets monthly and is responsible for continuously controlling quality of bank’s retail credits and credit cards portfolio and determining the policies for managing the portfolio in a perspective that would maximize bank’s profitability in a risk-return framework.

The Operational Risk Management Committee
Operational Risk Management Committee is composed of the Operations Assistant General Manager, Retail Assistant General Manager, SME Banking Assistant General Manager, the Chief Risk Officer, the head of compliance and the head of internal control.

Committee meets monthly, reviews operational risk issues of the bank and defines the necessary actions to be taken to minimize operational risks considering the cost-benefit relation.

Risk Management Department
In accordance with the BRSA requirements, Finansbank's Risk Management Division was established at the end of 2001, as an independent unit, which reports to the Board through the Risk Committee.

Mission of Risk Management is "creating value for shareholders by optimising the risk-reward trade-off, taking into account the interests of customers and employees, in a way consistent with best practices and compliant regulatory requirement, in line with the Group’s business strategy” by:

• Implementing a comprehensive risk management framework
• Identifying risks bank is exposed to and developing analytical tools for measuring these risks.
• Managing risk/reward profile effectively as well as improving the use and allocation of capital
• Providing adequate oversight of the exposures
• Promoting risk awareness and management culture across the Bank

The department consists of four units:

• Market Risk Management Unit
• Credit Risk Management Unit,
• Operational Risk management Unit.
• Model Validation Unit

Market Risk Management Unit is responsible for managament of market, interest rate and liqudity risks by identifying, measuring, monitoring and reporting as explained in following paragraphs.

Credit Risk Management Unit is responsible for identifying, measuring, monitoring and reporting credit exposures taken by the Bank in order to minimize the probable loss arising from failure of counterparties to meet the terms and obligations of agreement following trends in the credit market and the economy that may affect the profile of the Bank's credit portfolio, as well as identifying any opportunity to improve the risk-return balance of the Bank's business as explained in following paragraphs.

Operational Risk Management is responsible for providing a comprehensive framework for identifying, measuring, monitoring and managing all risks within the scope of the definition of operational risk as explained in following paragraphs.

Model Validation Unit is responsible for assessing the predictive ability of the risk models used in the Bank. Healthy risk models ensure consistent, accurate and effective risk discrimination in a stable and conservative manner. Model validation and monitoring is instrumental in making sure that models employed at Finasbank adhere to the highest standards. Validation process at Finansbank contains a mix of developmental evidence, benchmarking, process verification and outcomes analysis.

Market Risk
Market risk is the risk of potential loss arising from the adverse effects of interest rates, foreign currency exchange rates and equity price volatility inherent to the Bank's trading portfolio.

Regulatory capital is calculated using the standard method within the framework of BDDK regulations. Besides, parallel to the best practices in the world, Value at Risk (VaR) is measured daily for the Bank on a solo basis as well as on a consolidated basis -including the financial subsidiaries. VaR, which is a measure of the maximum potential loss on the trading portfolio, is calculated using the historical simulation method with %99-confidence level and 1-day holding period. In order to manage the market risk efficiently and to be consistent with the risk appetite, position limits for asset classes and an overall "Bank Risk Tolerance" is determined. Limit monitoring is done daily by the Market Risk Management Group.. While the value-at-risk approach provides a forecast for possible losses under “normal” market conditions, it cannot predict contingent losses under extreme conditions. Hence, VaR results are supported by regular stress tests and scenario analysis in order to incorporate possible extreme market movements. Stress tests are intended to simulate the impacts of crises, extreme market conditions and major changes in correlations and volatilities.

The Bank uses backtesting to verify the predictive power of the value-at-risk calculations. In backtesting, theoretical gains/losses calculated by VAR on positions at the close of each business day is compared with the actual gains/losses arising on these positions on the next business day. The assumption of the VaR model is reviewed and revised if such a need occurs as a result of the backtesting procedure.

Interest Rate Risk
Even though the Bank is exposed to structural interest rate risk on its balance sheet due to the nature of its existing activities, it’s ensured that this risk stays within the pre-defined limits. ALCO aims to protect the economic value of equity, while sustaining a stable earnings profile. Duration/GAP analyses, which rely on calculations of net discounted future cash flows of interest rate sensitive balance sheet items, are conducted to manage this risk.

Liquidity Risk
Liquidity Risk is defined as the current or prospective risk to earnings and capital arising from a bank’s inability to meet its liabilities -because of its balance sheet structure or market movements- when they are due. Finansbank aims to control its ‘cash and available funding sources/ deposits’ ratio within limits. Besides early warning indicators, stress levels and actions planned under different stress levels are defined in its ‘Contingency Plan’.

Credit Risk
Credit risk is defined as the risk of potential loss arising from a borrower's inability to meet its financial obligations.

Core components of credit risk management framework are defined below:

• Policies regarding credit application, credit approval, credit monitoring, managing problem loans are defined.
• Credit requests are prepared by experienced credit marketing officers based on analysis and evaluation of debtor's creditworthiness. Requests are approved by senior credit managers and/or credit committee depending on the amount requested.
• Different types of credit limits are established for the individual borrower, credit type and the borrowers from the same group.
• Statistically proven scorecards and rating systems are used for the assesments of creditworthiness of the obligor.
• Concentration limits are applied to the loan portfolio to keep the credit quality at the pre-agreed level. Limit categories are defined as: single borrower limits, group of connected borrowers' limit, industry limit, rating limit, country limit.
• Close monitoring enables the bank to quickly identify any problem loan and make every possible effort to solve the problem before the loan becomes nonperforming.

Operational Risk
Operational risk is defined as the risks of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events.

Finansbank is well positioned with regard to operational risk management. Activity-based operational risks are identified at Finansbank and categorized by cause, event and effect categories as proposed by Basel II. Operational loss data collection began in January 2005.

The Bank has a, business continuity management plan in order to ensure business continuity. The plan has been tested periodicaly and revised if needed to reflect the latest changes in the Bank’s business structure.