Financial risks that the CBRT may be exposed to due to its operations are composed of credit, market and liquidity risks and are managed in cooperation with business units. A great portion of credit, market and liquidity risks that the CBRT is exposed to due to its 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, financial risks related to the FX reserve management result from investment preferences. Meanwhile, the CBRT manages FX reserves within investment criteria defined in the Guidelines and within objectives and limits set by the benchmark portfolio and endeavors to minimize such risks by managing them in a conservative manner.
The credit risk that the CBRT is exposed to mainly results from investment transactions performed during FX reserve management, open market operations (OMO), Interbank Money Market (IMM) transactions and transactions of intraday liquidity facility provided to banks within the scope of monetary policy practices. 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. For some transactions, on the other hand, the payment-after-collection method is adopted.
The management of credit risk stemming from FX reserve management is based on credit risk analyses related to the trading partners and investments with issuing institutions. Accordingly, the CBRT employed a risk management procedure with three pillars to minimize the credit risk it is 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 credit rating criteria defined by the Guidelines. Secondly, to control all credit risks stemming from transactions, the total of credit risk limits that may be defined to trading partners was limited to a specified ratio of manageable reserves. Thirdly, among the institutions complying with the minimum credit rating criterion defined by the Guidelines, 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. In this scope, credit risk indicators of all the CBRT’s trading partners were closely monitored and reported to the senior management.
During the management of FX reserves, exchange rate, interest rate and price fluctuations in international markets also lead to market risk. Meanwhile, liquidity risk refers to the probability of incurring loss when meeting sudden unpredictable need for FX liquidity. Within the scope of the market and liquidity risk management, compliance with the limits defined by the benchmark portfolio was monitored and reported to the senior management. To manage liquidity risk, compliance with the limits set by the benchmark portfolio was monitored and reported to the senior management.
Other than the FX reserve management, those risks on the CBRT’s balance sheet pertaining to credit, market and liquidity were also measured, monitored and reported.
Under the operational risk management, operational risk factors of processes at the CBRT are assessed and reported with contributions from business units. This assessment is made by means of process-based risk matrices. In the risk matrix, gross risks are estimated in view of impact and likelihood and the controls implemented to reduce these risks are assessed and the residual risk is measured. For processes with a residual risk level above a certain threshold value, risk-reducing action plans are made. Meanwhile, operational risk incidents during the implementation of processes are registered in incident record reports. Corrective and preventive action plans regarding the detected risks in risk assessments and incident reports are monitored and reported. Additionally, communication and coordination of business continuity management within the CBRT is undertaken by the Corporate Risk Management Division. In 2021, risk assessments were made, and the legislation on business continuity management was reviewed in line with changing needs.
Lastly, efforts were made for harmonization of legislation to avert the risks that the CBRT may be exposed to by ensuring that the CBRT acts in accordance with the national and international standards and legal arrangements related to laundering of proceeds of crime and financing of terrorism. Accordingly, national and international developments were closely monitored and due measures were taken to ensure that the CBRT’s all activities were carried out in accordance with the relevant standards, monitoring and controlling activities were carried out. In this context, contributions were made to the work carried out by national stakeholders.