VKF_FRAE_2018_uyg11

116 Part III: Financial Highlights and Assessment of Risk Management Risk management activities continued in 2018 in line with the Bank’s risk management policies that were prepared as per national legislation and international practices and approved by the Board of Directors of the Bank. Risk management practices are implemented through policies, action plans, implementation procedures and limits determined for the quality and level of the Bank’s activities depending on the Bank’s risk-return structure. They include identifying, measuring, and reporting incurred risks on unconsolidated and consolidated bases, and monitoring the total required capital and liquidity adequacy regarding risk profiles. Policies and other documents are prepared as per the Banking Regulation and Supervision Agency (BRSA)’s “Regulation on Bank’s Internal Systems and Internal Capital Adequacy Assessment Process” and “Good Practice Manuals.” They are periodically reviewed, and updated if necessary. In 2018, efforts continued to follow up and monitor national and international regulations regarding risk management & capital adequacy and relevant developments. In line with economic developments and expectations, daily scenario analyses on the capital adequacy ratio and monitoring and analysis activities for the standard ratio of interest rate risks arising from banking accounts and for the liquidity coverage ratio were carried out also in 2018. The stress test reports issued at the end of each month covering all risk factors were regularly reported to the Bank’s top management. An “Internal Capital Adequacy Assessment Process (ICAAP) Report” was issued and submitted to the Banking Regulation and Supervision Agency in 2018, pursuant to the Regulation on Bank’s Internal Systems and Internal Capital Adequacy Assessment Process and “Good Practice Manuals.” The “Risk Appetite Statement” was updated in 2018 which determines the level of risk that the Bank is ready to take based on the risk capacity the Bank is anticipated to bear at a safe level in order to realize the Bank’s objectives and strategies. The Bank, with the Risk Appetite Statement, anticipates a risk capacity it will be able to bear at a safe level in realizing its objectives and goals; determines the risk level it is ready to take; and regularly monitors appetite indicators regarding capital, liquidity and risk concentrations established in the statement, and risk-based limits. Studies to calculate the market risk through the “Value at Risk” (VaR) model and to improve this model continued. Within the scope of operational risk management, data on operational losses is collected including subsidiaries and affiliates to make a consolidated analysis. Operational Risk Analysis reports, which include breakdown and evolution of data regarding losses, continued to be prepared and shared with the Senior Management. Furthermore, “Impact Analysis” activities for banking business processes were completed in 2018. Market Risk The market risk arising from trading transactions is measured and monitored using standard methods and internal models in conformity with national and international practices. Market risk is managed in accordance with the “Market Risk Management Policy Document.” Market risk measurement results are calculated monthly on unconsolidated and consolidated bases by using the standard method under the provisions of the “Regulation on Measurement and Assessment of Capital Adequacy of Banks,” and reported to the Bank’s senior management and the Banking Regulation and Supervision Agency. The portfolio to be included in the aforementioned calculation is determined pursuant to the Bank’s “Trading Strategy, Policy and Implementation Procedures Document.” Moreover, VaR (Value at Risk) calculations are made on a daily basis and reported accordingly. “Value at Risk” is calculated through a unilateral 99% confidence interval on a daily basis using historical simulation and Monte Carlo simulation. Daily tests are made retrospectively (back testing) in order to test the reliability and performance of the results of the model. Furthermore, scenario analysis and stress tests supportive of the standard method and internal models are performed. Followed in line with the general limits of the Bank and the early warning signal limit, VaR- based limit implementation is monitored on a daily basis in order to limit the market risk. Interest Rate Risk Interest rate risk, which the Bank may be exposed to due to maturity mismatch on its balance sheet, is managed in accordance with the “Interest Rate Risk Management Policy Document.” The standard ratio of interest rate risk arising from banking accounts is calculated on a monthly basis and reported to the Banking Regulation and Supervision Agency. Besides, calculations are also made on a weekly basis in order to track the ratio and take prompt actions. Gap analysis is carried out based on the time left for repricing, and reports are issued on the interest rate risk while duration measurements and sensitivity analyses are periodically performed. The Bank established and put in practice procedures for interest rate risk appetite. Interest rate risk limits were determined in line with the interest rate risk appetite. Relevant limits are periodically reported to Bank’s Senior Management. Liquidity Risk The Bank’s liquidity risk is managed in accordance with the “Liquidity Risk Management Policy Document.” The Bank’s approach for liquidity risk management is RISK MANAGEMENT POLICIES APPLIED BY RISK TYPE