On-site Supervision

BBDK REMOTE MONITORING APPLICATION

The recent financial crisis which has started in the US and spread to Europe, provides an important ground for investigation for risk managers regarding the necessity of regulation and monitoring. The prevailing financial crisis has shown how destructive a financial system that lacks proper regulation can be. Turkey had an important experience regarding this. The 2001 crisis, that broke as a result of the borrowing rush of Turkish banks and widened by the devaluation of the Turkish Lira due to excess demand of foreign currencies, has cost the country around 20% of the GNP. The corrective measures taken after the crisis in the financial sector, has made the financial sector in Turkey relatively stronger then its foreign counterparts.

At this point Risk Software Technologies provides the Banking Regulation and Supervision Agency (BDDK) with the services that both enables supervision and overseeing.

 

OUTLINE OF THE APPLICATION AND ITS ADVANTAGES

  • Web based software allows users to connect to the software from any computer around the world that has an internet connection
  • A Web Based Application That Works in Real Time.

 

COMPONENTS OF THE APPLICATION

 

  • Oversight
  • Supervision

 

Oversight:

In order for regulatory bodies such as BDDK to apply any sanctions, they first need to identify if the banks have met the requirements set forth by these institutions.  Through the BDDK Remote Monitoring Application, RST provides BDDK with a detailed and easy to use supervision tool.

 

Components of the Oversight Tool:

  • Risk Modules
  • Scenarios
  • The Analysis Module
  • Revision
  • The Analysis of the Banking Sector

 

Risk Modules:

  • RST presents BDDK with several risk modules:
  • Credit Risk
  • Liquidity Risk
  • Interest Rate Risk
  • Foreign Exchange Risk
  • Market Risk
  • Operational Risk
  • Accordance Risk
  • Strategic Risk
  • Reputational Risk

 

  •  

Scenario Generation:

The Credit, Liquidity, Interest Rate, FX and Market Risk modules have the ability to construct detailed and flexible scenarios that incorporate parallel and non parallel shocks to related risk factors.   These scenarios provide graphical results that allow the users to compare the results for the target bank with sector averages, similar groups and other banks that show the relative position of the target bank.
The main pitfall of the scenarios constructed within the risk modules is that they are based exclusively on risk factors present in different risk modules.  For example, the scenarios constructed in the Credit Risk Module are affected by default rates, however changes in interest rates or FX rates have no impact on the outcome.  To overcome this problem, along with scenarios based on different risk modules, RST offers aggregate risk scenarios that consider credit, interest rate and FX risks together.

 

The Analysis Module:

In this module, the financial structure of banks and their sensitivities to risk are inspected through standard ratios composed of balance sheet items.  In addition to standard ratios, the application offers a custom ratio generation tool using any of the items on the balance sheet.

 

Revision

The program allows for revising the balance sheet, profit and loss, liquidity, foreign currency and capital adequacy forms presented to the BDDK.  Suppose the BDDK auditor spots a bad loan account during the supervision process of a bank.  Then, the financial statements of the bank in question are revised as to cover that account as a bad loan.

 

Analysis of the Banking Sector

The sector analysis component allows for raw banking data sent to the BDDK to be examined under with different aggregation levels.  Through different aggregation levels, users may investigate the whole banking sector, as well as observing individual bank data.  Furthermore, the results of revisions made in the financial statements of banks are compared to the raw data in the main module.


 

Features of The Oversight Component:

 

  • Abilty to compare the target bank with sector averages or other banks for all the risk modules present in the application:     
  • Separating retail and commercial credits and calculating credit risk measures such as EL, UL and Economic capital for these two segments separately.
  •       Observing the liquidity mismatch based on different maturity brackets cumulatively or with ratios.      
  • To measure the interest rate related risks that a bank’s assets and liabilities are exposed to, the application calculates interest rate elasticity and conducts duration and GAP analyses.
  •      
  • Ability to calculate Value at Risk to measure market risk, using different methods including Historical Simulations.  Moreover, apart from aggregate risk measures, the application offers marginal risk contributions of different risk factors.

 

Supervision

Supervision process constitutes the second step of monitoring.  After this process is over, BDDK may apply sanctions if the target bank has not met the requirements set forth by the regulators.

 

Components of the Supervision Tool

  • Pre-Investigation
  • Risk Matrices
  • Reporting

 

Pre-Investigation

The first step of supervision is the pre-investigation process comprised of guide line questions to be answered by the BDDK auditors.  These questions are important as they form a basis for further investigation.  The auditors conduct this process with under the following topics:

  • Risk Modules
  • Internal Audit
  • CAMELS

 

Risk Matrices

Forming risk matrices based on pre-investigation questions is the second phase of the supervision process.  Auditors have the ability to construct aggregate risk matrices as well as conducting more detailed analyses at an atomic level.


 

Reporting

Forming audit reports in light of pre-investigation questions and risk matrices constitutes the last step of the supervision process.  Following reports are prepared in this final phase:

  • Risk Modules
  • Internal Audit
  • CAMELS 

 

Features of the Supervision Component

  • A monitoring process that allows for participation of different members of the institution, including the president and the vice president, at different authorization levels
  • The ability to use former supervision and oversight data and reports
  • Custom question construction, in addition to pre-investigation questions embedded in the application
  • Synchronization with MS Office Word during the reporting process
  • Different file attachments to pre-investigation questions
  • A feedback mechanism that allows for monitoring when and by whom a final report has been prepared, revised, and approved

© 2023 Risk Software Technology