2.7 Corporate Risk Management Activities

The organization structure of the CBRT was renewed as of 1 March 2018. Accordingly, to ensure corporate and holistic management of risks that the CBRT may face, the Corporate Risk Management Department has been established. This department consists of the Financial Risk Management Division, Operational Risk Management Division and Compliance Division.

Under the financial risk management, credit, market and liquidity risks that the CBRT may be exposed to due to its operations are managed in cooperation with business units. Almost all financial risks resulting from CBRT operations emerge in the course of fulfilling legal duties such as implementing monetary and exchange rate policies, managing foreign exchange reserves, and providing certain banking services to the banking sector and the government. Financial risks that the CBRT encounters while implementing monetary and exchange rate policies in its capacity as the monetary authority are a consequence of the policy targets chosen. On the other hand, FX reserve management-related financial risks emerge as a consequence of an investment preference. The CBRT endeavors to minimize such risks by managing them in a conservative manner. FX reserves are managed within investment criteria defined in the Guidelines and within objectives and limits set by the benchmark portfolio to be implemented in the following year. The credit risk mainly results from investment transactions performed during FX reserve management, open market operations performed to provide banks with short-term liquidity under monetary policy implementation, IMM transactions, and transactions of intraday liquidity facility offered to banks. The CBRT’s credit risk arising from monetary and exchange rate policy-related transactions was managed by collateralizing the whole amount of transactions, including a specified amount of margin, with securities of very high credit worthiness that can also be traded on secondary markets (such as FX deposits, GDDS and securities issued by advanced countries’ treasuries or by international institutions) and by regularly monitoring the current risks and asking for additional collateral.

The FX reserve management-related credit risk is managed based on the principle of minimizing the trading partners’ probability of default and the financial loss that may occur in case of default. Accordingly, the CBRT employed a risk management procedure with three pillars to minimize the credit risk it becomes exposed to during its FX reserve management. Firstly, it limited its investments to leading international financial institutions and borrowers with high credit quality that comply with the minimum credit rating criterion defined by the Guidelines based on credit ratings given by international credit rating agencies (CRA). Secondly, the total of transaction limits defined to control all credit risks, including the swap risk, that arise from transactions with financial institutions was limited to a specified ratio of manageable reserves. Thirdly, among the institutions complying with the Guidelines-defined minimum credit rating criterion, those which could also conduct transactions by using main and financial analysis methods were identified, and a credit risk limit was defined for each one. The total of these limits was capped by a specified ratio of the CBRT’s FX reserves. In this scope, credit risk indicators of all the CBRT’s trading partners were closely monitored and reported to the senior management periodically. During the management of FX reserves, exchange rate, interest rate and price fluctuations in international markets also lead to market risk. Under the market risk management, compliance with the objectives and limits defined by the annually-set benchmark portfolio was monitored and reported to the senior management.

Another important risk encountered during reserve management is the liquidity risk. This risk refers to the probability of incurring loss when meeting sudden unpredictable need for FX liquidity. To manage liquidity risk, compliance with the limits set by the benchmark portfolio is monitored and reported to the senior management.

Credit, market and liquidity risks at national and/or international financial system level, which may cause major financial losses with spillover effects on the CBRT’s balance sheet, are defined, measured, monitored and reported as systemic risk factors.

Under the operational risk management, the CBRT engages in activities consisting of defining and measuring operational risk factors, prioritizing and periodically reporting these risks, making risk assessments regarding business continuity management, preparing business impact analyses and ensuring cooperation in emergency management. Accordingly, risk matrices were designed to form the basis of the operational risk management methodology and a guide on the application of these matrixes was drawn up. Additionally, training activities were organized to increase risk awareness. Work was carried out to measure natural risks inherent in all business processes and to identify risk-based main processes, and the CBRT’s operational risk map was drawn. Starting with prioritized risks, risks included in the processes of identified business units were analyzed in detail by means of risk matrices, and corrective and preventive actions were planned after the residual risks were measured. Incident record reporting practice was put into effect and operational risk incidents at the CBRT as well as the measures taken were monitored and reported. Under business continuity management, in cooperation with business units, business continuity implementation plans were tested in emergency backup centers.

Lastly, the CBRT carried out work to define, measure and report on risks related to legislative harmonization, and to recommend measures for these risks in cooperation with business units. To ensure that the CBRT is protected against risks related to laundering of proceeds of crime and financing of terrorism and that the CBRT’s activities are carried out in accordance with the national and international legislation on the prevention of the laundering of proceeds of crime and financing of terrorism, monitoring and controlling activities regarding the transactions and customers in certain risk groups as well as transactions with risky countries were ensured. Following the risk assessments based on these activities, the CBRT contributed to the development of some in-house applications.