Risk Management

TABLE OF CONTENTS
Foreword    III
Introduction        1
I- General View on the Banking System    5
1.1.Financial Evulution and Banking    8
1.2.Financial Intermediation    10
1.3.Financial Instruments and Markets    18
1.3.1.Financial Systems    19
1.3.2.Valuation in Securities    21
1.3.4.New types of Financial Instruments (Means)    24
1.3.4.1. Derivative Products    25
1.3.4.1.1.Forward Transactions    26
1.3.4.1.2.Futures Transactions    27
1.3.4.1.3.Swap Transactions    29
1.3.4.1.4.0ptions    31
1.3.4.2.Reasons for non-utilisation of Derivative Products in Turkey    41
1 .S.Invertation Policies        41
1.5.1.Financial Liberty and Banking    41
1.5.1.1.Liquidity Effect    42
1.5.1.2.Effect on Financial Prices    43
1.5.1.3.Effect on Savings    46
l.ö.Financial Liberty Policies applied in Turkey and in Financial Markets    47
1.6.1.Reform on Interest Rates and Consequences    48
1.6.2.Reform on the foreign exchange regime and Consequences    48
1.6.3.Financial Reforms and Consequences    49
1.6.4.Development of Interest Rates and Foreign Exchange Rates in Turkish
Economy    51
1.6.5.State of the Banking Sector in 1995 and After    54
1.7.Financial Development Process in East European Countries (1987-1992)    58
1.7.1.Banking in view of Economic and Structural Problems in Eastern
Europe...:    48
1.7.1.1. Banks and Loan Mechanism    62
1.7.2.Stock Markets and Privatisation        63
1.7.2. l.Contribution of Banks To Privatisation As Financial
Intermediaries    65
1.7.3.Consequences of Financial Liberalisation Practices in Eastern Europe.... 66
II- TRANSITION TO MODERN BANKING    69
2.1.BIS and BASIL Committee    69
2.2.Capital adequacy Approach    70
2.2.1.Minimum Capital Adequacy    71
2.2.2.Supervision of Capilal Needs (Extemal supervision)    72
2.2.3.Market Discipline        73
2.3..Assessment, Rating of Risks    74
2.3.1.Assessment of Country Risk Weights    74
2.3.2.Assessment of Bank Risk Weights    76
2.3.3.Assessment of Corporate Risk Weights    77
2.3.4.Risks Rating Institutions    78
2.3.5.Risk Taken Under Assesment        78
2.3.6.Evaluation (Credit) Rates    79
REFLECTİONS IN TURKEY    81
2.4.Banking Regulation and Auditing Board (BDDK) and Savina Deposits
Insurance Fund (TMSF)    81
III-Risk Management...    89
3.1.Frame of Risk and its Development    90
3.1.1 .Disposition of VaR according to the type of risk    92
3.2.Types of in Banks    93
3.2.1.Loan Risk    94
3.2.2.Liquidity Risk    96
3.2.3.1nterest Risk    98
3.2.4.Foreign Exchange Rate Risk        99
3.2.5.Market Risk    100
3.2.6.Country and Transfer Risk    101
3.2.7.SoIvency Risk    101
3.2.8.0perational Risk    102
3.2.9.Lega! Risk    102
3.2. lO.Reputation Risk    103
3.3.Profitability in Banking    103
3.3.1 .Balance Sheet and Banking Administrations    104
3.3.2.Portfolio of Banking    105
3.3.2.l.Transactions not inciuded in the Balance Sheet    106
3.4.Measurement of Risks in Banks    108
3.4.l.Maturity Gap Model    108
3.4.2.Duration Analysis    109
3.4.2.1.Duration Gap Model    109
3.4.2.2.Duration Gap of Net Interest Income    109
3.4.2.3.Duration Gap of Non-sensitive Items    110
3.4.2.4.Duration Gap of Net Worth    110
3.4.4.Statistical Analysis    110
3.4.4. l.Correlation    110
3.4.4.2.Scenario Analysis    110
3.4.5.Unexpected Loss and Value at Risk VaR.    110
3.4.5.l.Parametrical VaR    112
3.4.5.2.Monte-Carlo VaR    113
3.4.5.3.Chronological VaR    113
3.4.5.4.Delta-Gamma VaR    113
3.4.6.Stress Test    114
3.4.7.CAR-Capital At Risk    114
3.-5.Risk Management Process in Banks    118
3.5.1. Determination of Ri sks    120
3.5.2.Measurement-Evaluation of Risks    120
3.5.3.Direction of Risks    122
3.5.4.Reporting of Risks    122
IV-Development of Organisations    125
4.1 .New Banking Regulations    126
4.1.1.Basic Concepts    127
4.1.3.Change Management    132
4.1.4.0rganisational Structures and Approaches to Management    135
4.1.5.Management of Information Systems        140
V-Risk Management Organisation    145
5.1.Legal Expectations    145
5.1.1.Target Specification    145
5.1.1.1.Legal Targets    145
5.1.1.2.Institutional Targets    151
5.1.2.0rganisational Structure    159
5.1.2.l.Loan Risk Management    165
5.1.2.2.Assets-Liabilities Management    165
5.1.3.Identification of Risk Limits    170
5.1.4.Identifıcation of Information Systems Practices    174
5.1 .S.Formation of Risk Culture    175
Vl-Conciusion And Advices    181
6.1.1 .Classical Definition Of Risk    181
6.1.2.Modem Definition Of Risk    181
6.2.Factors Of Risk Management    182
6.3.Macro recommendations    183

 
References        185
Index    191
ANNEXES    193
Annex 1: Organisational Regulation of Banking Regulation and Auditinglnstitution.,197
Annex 2: Regulation on Internal Auditing and Risk Management Systems in Banks..219
Annex 3; Regulation on the Measurement and Assessment of Capital adequacy in
Banks    255
Annex 4: Prmcıples for the Measurement of market risk    285