Banking Regulation and Supervision Agency of Turkey (BRSA) Tuba GEÇER ER Senior Bank Examiner Başak ak YETİŞ İŞEN TEKER Banking Specialist Moscow, 28 September 2011
Who We Are Banking Regulation and Supervision Agency Independent Banking Authority Established in 2000 Regulation and supervision of the banking sector Its mission to provide safeness and soundness of financial markets in Turkey 1
Goals and Duties of BRSA The Fundemental Goals of BRSA are: To ensure the confidence and stability in financial markets, To provide effective operating of loan system and, To safeguard the rights and interests of depositors. The Fundemental Duties of BRSA are: To take necessary decisions and measures in order to protect the rights of depositors and ensure sound operating of the credit system and to implement them, To regulate, enforce and ensure the enforcement thereof, to monitor and supervise the implementation of establishment and activities, management and organizational structure, merger, disintegration, change of shares and liquidation of banks and financial holding companies as well as leasing, factoring and financing companies without prejudice to the provisions of other laws and related legislation. 2
Organisation Structure 3
The Scope of Operations LICENSING AND ENFORCEMENT ACTIVITIES 4
The Scope of Regulation 5
The Main Regulations (I) Banking Law No: 5411 (Banking Law 4389 is former one) Bank Cards and Credit Cards Law Fundamental sub-regulations: Regulation on own funds Regulation on credit operations Regulation on capital adequacy ratio (CAR) Regulation on liquidity Regulation on ratio of net foreign currency positions (FX regulation) 6
The Main Regulations (II) Fundamental sub-regulations: Regulation on the banks corparate management principles Regulation on rating agencies Regulation on classification and provisioning of loans and nonperforming loans (NPLs) Regulation on interest rate risk in the banking book Regulation on internal system of banks Regulation on financial holding companies 7
Integration to International Standards 8
Convergence to Best Practices Convergence Uniformity From our understanding, convergence means; moving closer to each other based on best practices but still being able to take into account national specificities! INTERNATIONAL PERSPECTIVE NATIONAL SPECIFICITIES important: Balance! 9
Basel-II Road Map 01.07.2011 30.06.2012 PARALLEL RUN Only for Reporting Not any sanction THE COMMENCEMENT DATE of BASEL-II Only Standardised Approach for Credit and Operational Risk 10
The Risk Components of Basel II 11
Implementation Process in Turkey 12
From The World From International Press: The Banker 30 June, 2011 Good regulation (and dose of good luck) in countries such as CANADA and TURKEY proved its worth during the last crisis Turkey s Renaissance: From Banking Crisis to Economic Revival From the IMF By Hugh Bredenkamp, Mats Josefsson, and Carl-Johan Lindgren 13
The Pre-crisis Conditions of Turkish Banking Sector (Pre- 2001) Inadequate capital base Small and fragmented banking structure Dominance of state banks in total banking sector Weak asset quality (concentrated credits, group banking and concentrated risks, mismatch between loans and provisions) Extreme exposure and fragility towards market risk (maturity mismatch, FX open position) Inadequate internal control systems, risk management and corporate governance Lack of transparency 14
Banking System Restructuring Program (2001)- (I) 15
Banking System Restructuring Program (2001)- (II) BANKING SECTOR RESTRUCTURING PROGRAM State Bank Reform Strong Capital Base T.C Hazine İhracı YP Kamu Menkul Kıymetleri İçin Spesifik Risk Cost Efficiency Efficient Supervision Market Discipline and Transparency Sound Banking Strong Economy and Sustainabl e Growth Enviroment Corporate Restructuring Structural Reform Macroeconomic Stability Decline in Public Deficit 16
The Results of Restructuring Program Consolidation in the banking sector Increase in mergers and acquisitions Decline in the share of the State and the SDIF Banks Removal of distortionary effects of insolvent and state banks on interest rate Reduction of financial risks to manageable levels Strengthened the capital structure Improved transparency in financial statements Improved regulatory and supervisory framework 17
The Consolidation Process of Turkish Banking Sector 1980 1990 1999 2000 2001 2002 2005 2011 Commercial Banks 31 54 62 61 46 40 35 31 State 8 7 4 4 3 3 3 3 Private 19 25 31 28 22 20 17 11 Foreign 4 22 19 18 15 15 13 16 SDIF - - 8 11 6 2 2 1 Participation Banks - 3 6 5 5 5 5 4 Invest. & Dev. Banks 6 10 19 18 15 14 13 13 TOTAL 37 67 87 84 66 59 53 48 18
What We Did For the Prudent Regulation 19
The Current Situation 12 March 2009 FSB Membership 25 May 2009 Basel Committee on Banking Supervision Supervision Committee Membership As a member country of G-20, BRSA undertakes the adopt Basel III reforms. 20
SUPERVISION Risk Based Supervision (is what we do) 21
Why Risk Based Supervision (RBS)? When and why we started RBS? (21 deposit banks failed from 1998 to 2003) 22
What is this thing called RBS? The focus of RBS is to identify, measure, control and monitor the risks arise from banking activities and to evaluate the adequacy of internal audit and risk management The aim of RBS is to ensure that banks are understanding and controlling levels and types of risks they face, not to prevent banks from taking risks. 23
So what are the risks? Credit Risk, Interest Rate Risk, Liquidity Risk, Market Risk, Foreign Exchange Risk, Operational Risk, Compliance Risk, Strategic Risk, Reputational Risk. These risks constitute the risk profile of the bank 24
Risk Based Supervision Scope, frequency and intensity of supervisory methods used in the audits are decided by not only taking into account bank s risk profile but also the quality of bank s internal control and risk management systems. (we check the checkers) 25
Risk Based Supervision is Proactive monitoring the risks, mitigating risks before the loss, taking precaution to increase the quality of risk management and internal audit Flexible supervision is tailored for each bank according to degree of reliability of the bank risk management and internal audit system, 26
Classical Supervision & Risk Based Supervision-1 Differences Classical Approach Risk Based Approach Focus of Supervision Confirming the accuracy of the financial statements and revaluation of the bank assets. Evaluation of Bank s internal control and risk management systems taking into account the risk profile of the bank Consistency Supervision bases on a certain date (balance sheet date). Supervision is consistent and dynamic. Communication Between Supervisors and Bank Management There is less communication with bank management. Supervisors communicate with bank management via formal/informal meetings, letters and audit reports. 27
Classical Supervision & Risk Based Supervision-2 Differences Classical Approach Risk Based Approach Investigation Procedure Focuses on the past. Determining the values of bank assets and determining the strength and reliability of bank at an exact time. Focuses on the future Evaluating the procedures used to manage existing and future risks. Organizational Area aims to investigate risk management applications in which the bank is licensed. focuses on basic activities of the bank, risks which are caused by mentioned activities and risk management systems. Monitoring of Bank Operations Monitoring and evaluations are exercised with the help of audit reports prepared annually and quarterly. Monitoring and evaluations are consistent. More interaction with staff Internal systems are consistently evaluated. 28
Classical Supervision & Risk Based Supervision-3 Differences Classical Approach Risk Based Approach Point of View Supervision Plan Bottom-up approach Aims to identify and quantify the results of the problems. Planning audit activities depends on the bank. Investigations are carried out according to the procedures provided from inspection guide. Top-down approach. Aims to determine the causes of the problems. Planning audit activities depends on the bank s main risk areas and risk profile. Allocation of Supervision Sources Audit teams are short-lived. Auditors usually don t have specific information about the organization of the bank. A stable audit team is formed. This team has information and experience about the organization of the bank 29
Classical Supervision & Risk Based Supervision-4 Differences Classical Approach Risk Based Approach Application Point of View Reactive Correction of the incorrect applications or compensation of the actual damages detected in supervisions. Proactive (reactive in case of necessity) Reduction of the incorrect application and the possible damages by eliminating the systemic or organizational problems may result in incorrect application. Focus of Application Correction of the results of the detected problems. Correction of the causes of actual or possible problems. 30
Classical Supervision & Risk Based Supervision-5 Differences Classical Approach Risk Based Approach Application Tools (Administrative) Application Tools (Administrative) Instructions. Administrative fine Judicial discipline. Meeting with bank management, Persuasion, Risk-reduction program, Action plan, Instruction. Increase minimum capital, Adequacy ratio, Increase deposit insurance premium, Restrict activities, Reduce risks, Restrict organization, Administrative fine, Judicial discipline. 31
How do we supervise? (our supervision cycle, rating system, CAMELS, reports and more) 32
Supervision Cycle How long it takes to supervise? Supervision consists of independent processes that are repeated in cycles and follow each other. Depends on bank's risk profile, size, diversity and complexity of activities on (We actually never leave the banks) 33
Who is to supervise? Audit Groups Bank Auditors and Assistants Banking Specialists and Assistants Headed by a Group Leader At least 5 years experience on-site supervision, Coordination of audit and execution of works, 3 years duration for accumulation of information on bank 34
How do we assess the risks? r s? Previous risk assessment report Meeting with previous audit team, Expectations and policies of the bank for the future, Meetings performed with upper and middle level managers, Surveillance reports, News in public and media, Independent audit reports Correspondence with BRSA and other public institutions, Board of directors & audit committee minutes. ( and come up with the risk profile of the bank ) 35
We have a plan Audit Plan Prepared by the group leaders, Approved by the upper management of BRSA The scope and the level of surveillance/audit are determined. 36
Execution of Audit BRSA audit system consist of two basic activities On-Site Supervision Off-Site Supervision which support and complement each other. 37
On-Site Supervision Analysis of the connections between Banks' assets, liabilities, equity, debt, profit and loss accounts, commitments and all other factors affecting the financial structure, Investigation of the adequacy and effectiveness of risk management and internal control systems, Determination of risk assessment and risk profile, Supervision of the financial tables and records according to accounting principles and auditing standards, Analysis of the adequacy and reliability of the information systems. 38
On-Site Supervision Supervision the activities compliance with the Banking Law No. 5411 and in the other laws about the institutions under this Act. Consolidated supervision of financial holding company, bank subsidiaries and jointly controlled subsidiaries Assessing the quality of corporate management Supervision the activities of real and legal persons that provide services to organization, Investigation subjects relating to operation that are special, Consist of other on-site supervision activities. 39
On-Site Supervision Risk Assessment CAMELS, Branch Supervision, Compliance, Denunciation and Complaint Investigations, Investigation sent by the Prosecution, Anti-money Laundering Investigations 40
On-Site Supervision Sector Analysis, Factoring Supervision, Leasing Supervision, Consumer Finance Company Supervision, Asset Management Company Supervision, External Audit Company Supervision, 41
Our Rating System : CAMELS In the evaluation of Banks financial structure and competencies related to management and organization the CAMELS Rating System is used. CAMELS consist of 6 main evaluation criteria: C Capital Adequacy A Asset Quality M Managerial Ability E Earnings L Liquidity S Sensitivity to Market Risk 42
CAMELS-2 Each financial institution is given a compound (final) degree from 1 to 5 which result from evaluations of six components (C-A-M-E-L-S). 1 refers to maximum degree, strongest performance and risk management system, and minimum audit requirement; 5 refers to minimum degree, weakest performance and inadequate risk management, and consequently to the maximum audit requirement. (these degrees have an effect on deposit insurance premium) 43
CAMELS-3 Harmonizing with varying conditions and risks, and ability to manage new problems which may be encountered in new activity fields are important factors for the evaluation of general risk profile of financial institute. Therefore the management component should be paid special attention during compound marking. The managerial ability to define, measure, monitor, and control the risks arise from banking activities is also important when marking each component. (M is the most important letter of CAMELS) 44
Off-Site Supervision-1 Carried out by Audit Teams, Routine monitoring on solo and consolidated basis, Monitoring on the basis of high risk activities, Monitoring the results of the instructions given to the Banks, Analytical investigations from surveillance data, Monitoring of developments in credit, interest rate, foreign exchange and liquidity risk, Stress tests and scenario analysis, Monitoring and evaluation of financial structure and the process of change in performance with periodic reports. 45
Off-Site Supervision-2 Monitoring the development of rating grades by using the previous audit results and recent datas, Providing perception of change in financial structure and performance by early warning systems on time, Monitoring and analysis of financial developments on the basis of sector and organization. 46
Banking Data Transfer System Reports (Period) Daily, Weekly, Monthly, Quarterly, Annually Reports (Type) Solo, Consolidated Reports (Type) Bank, Islamic Bank, Independent Audit, Foreign Reporting (Associates, Subsidiaries, Jointly Controlled Companies), Non-Bank Financial Institutions(Factoring, Leasing, Consumer Finance) Asset Management Companies Financial Holding Companies (and numerous other reports we can produce) 47
Final Meeting Findings are shared with bank s senior management with coordination of the group leader in the final meeting and the report is submitted to the Audit Department. (of course some findings may be inconvenient to share with the bank) 48
What happens as a result of the reports? Implementation of the suggestions contained in reports Special warnings, precautions, fines to the Bank Sectoral warnings and precautions. ( what we all do is for the safety and soundness of the banks ) 49
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