PART II BANKING REGULATION AND SUPERVISION AGENCY

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PART IIBANKING REGULATION AND SUPERVISION AGENCY

• SWORN BANK AUDITORS
• ON-SITE BANK SUPERVISION PROCEDURE
• DR. SEDAT YETIM
• MARCH 1, 2005

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ON-SITE BANK SUPERVISION

• Supervision Plan
• Before On-site Supervision
• During On-Site Supervision
• After On-Site Supervision

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ON-SITE BANK SUPERVISIONSupervision Plan

• On-site supervision plan is made by the head of
  sworn bank auditors and the chairman of the
  agency.
• When preparing the plan,
• Previous on-site supervision results,
• Off-site surveillance findings,
• Findings of other departments of BRSA,
• Comments and suggestions of other regulatory
  bodies (SEC, CBRT,) and departments of BRSA
• Developments in the banking industry are taken
  into consideration.

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ON-SITE BANK SUPERVISIONSupervision Plan

• Each national bank receive a full-scope, on-site
  supervision at least once every 12 months.
• Supervision plan contains
• Banks (and other financial institutions like
  Islamic finance institutions) which will be
  supervised on-site
• Priorities (which banks should be supervised
  first and intensively)

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ON-SITE BANK SUPERVISIONSupervision Plan

• After the supervision plan agreed upon, a
  supervision program is done by the head of sworn
  bank auditors depending on the plan.
• Supervision program is prepared semi-annually or
  quarterly and approved by the chairman of the
  agency.
• Supervision program contains assignment of banks
  to bank auditor teams.

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ON-SITE BANK SUPERVISIONSupervision Plan

• After the approval of chairman, the supervision
  program is handed out to bank auditors.
• Each auditor declares the beginning date of
  examination.

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ON-SITE BANK SUPERVISIONBefore Supervision

• As soon as bank auditors take the supervision
  program, they review
• the previous on-site supervision reports,
• off-site surveillance findings,
• comments of other departments
• of assigned bank(s), which are kept in the bank
  files of sworn bank auditors and other
  departments.

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ON-SITE BANK SUPERVISIONDuring Supervision

• After reviewing necessary information, a meeting
  is arranged with the GM and BoD of the assigned
  bank.
• During this meeting,
• Purpose and the scope of the examination is
  communicated clearly to bank,
• Bank auditors ask for cooperation during
  examination.

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ON-SITE BANK SUPERVISIONDuring Supervision

• The examination plan is developed by bank
  auditors before starting examination.
• Planning includes assessment of banks current
  and future risks arising from existing and
  planned activities.
• Examination activities are based on supervisory
  strategies developed in planning process.
• Supervisory strategies are updated frequently
  based on developments in banks activities,
  banking industry, general economic conditions and
  regulations.

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ON-SITE BANK SUPERVISIONDuring Supervision

• Examination areas to be focused on are determined
  based on supervisory strategies, including major
  branches daily operations.
• Core assessment and risk assessment is conducted
  in each examination area based on supervisory
  manuals.
• Risk assessment procedure is added to supervisory
  process of sworn bank auditors as a last
  development.
• The quantity of risk and quality of risk
  management related to each examination area are
  evaluated during examination.

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ON-SITE BANK SUPERVISIONDuring Supervision

• Sworn Bank Auditors asses the following factors
  during examination as a minimum standard.
• Capital Adequacy
• Asset Quality
• Management
• Earnings
• Liquidity
• Sensitivity to market conditions
• Off-balance sheet activities

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ON-SITE BANK SUPERVISIONDuring Supervision

• CAPITAL ADEQUACY To evaluate the banks capital
  level, following areas are examined by the bank
  auditors.
• The level and the quality of capital and the
  overall financial condition of the bank
• Determine whether the bank complies with the
  legal capital adequacy rules.
• Banks should maintain a capital level computed
  according to the credit risk and market risk
  (interest rate risk, price risk and exchange rate
  risk) levels.
• Whether the bank uses standard method or model
  method to compute capital adequacy ratio (8).
• If the bank uses model method, bank auditors
  check the model assumptions and back testing
  results.

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ON-SITE BANK SUPERVISIONDuring Supervision

• Determine whether the bank complies with the
  legal rules regarding capital level other than
  capital adequacy ratio (Banks Act, articles 9/6/a
  ve 7/2 and Foreign Currency Position-Capital
  Ratio Regulation)
• Examine the composition of capital base (e.g.
  amount of tier 1 and tier 2 capital)
• Evaluate the ability of management and owners to
  adress emerging needs for additional capital
• Evaluate the ownership structure of the bank

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ON-SITE BANK SUPERVISIONDuring Supervision

• ASSET QUALITY To assess the asset quality of the
  bank following areas are examined.
• The adequacy of credit administration procedures
  and appropriateness of risk identification
  systems
• The level, distribution, severity and trend of
  problem, non-accrual, restructured and
  nonperforming assets.
• The adequacy of the allowance for loan losses and
  other asset valuation reserves.
• The diversification and quality of the loan
  portfolio

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ON-SITE BANK SUPERVISIONDuring Supervision

• The existence of asset concentration
• The ability of management to properly administer
  its assets including timely identification and
  classification of problem assets
• The adequacy of internal control and management
  information systems
• The credit risk arising from off-balance-sheet
  transactions
• The first 100 loans or 70 of all loans,
  whichever is larger, are examined one by one
  during examination

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ON-SITE BANK SUPERVISIONDuring Supervision

• MANAGEMENT To assess the quality of the bank
  management following areas are examined.
• The level and quality of oversight and support of
  all bank activities by the board of directors and
  management,
• The ability of the board of directors and
  management, to plan for and respond to risks that
  may arise from changing business conditions or
  introducing new activities or products,
• The adequacy of appropriate internal policies and
  controls addressing the operations and risks of
  significant activities,

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ON-SITE BANK SUPERVISIONDuring Supervision

• The accuracy, timeliness and effectiveness of
  management information and risk-monitoring
  systems appropriate for the banks size,
  complexity and risk profile,
• The adequacy of audits and internal control to
  maintain effective operations and reliable
  financial and regulatory reporting,
• Compliance with laws and regulations
• Responsiveness to recommendations from auditors
  and supervisory authorities,

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ON-SITE BANK SUPERVISIONDuring Supervision

• Management depth and succession,
• The extent to which the board of directors and
  management is affected by a dominant influence or
  authority,
• Willingness to serve the legitimate banking needs
  of the general economy.

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ON-SITE BANK SUPERVISIONDuring Supervision

• EARNINGS To assess performance of earnings,
  following areas are examined.
• The level of earnings, trends and stability of
  earnings,
• The ability to provide for adequate capital
  through retained earnings,
• The quality and sources of earnings,
• The level of expenses in relation to operations,
• The adequacy of the budgeting systems and
  management information systems in general,

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ON-SITE BANK SUPERVISIONDuring Supervision

• The adequacy of provisions for loan losses and
  other valuation allowance accounts,
• Dividend policy of the bank.

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ON-SITE BANK SUPERVISIONDuring Supervision

• LIQUIDITY To assess the adequacy of the banks
  liquidity, following areas are examined.
• The adequacy of liquidity sources compared with
  present and future needs and the ability of the
  bank to meet liquidity needs without affecting
  adversely its condition,
• The availability of assets readily convertible to
  cash without loss,
• Access to money markets and other sources of
  funding,
• The level of diversification of funding sources,
• The degree of reliance on short-term, volatile
  sources of fund,

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ON-SITE BANK SUPERVISIONDuring Supervision

• The trend and stability of deposits,
• The capability of management to properly
  identify, define, measure, asses, monitor and
  control and report the banks liquidity position.

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ON-SITE BANK SUPERVISIONDuring Supervision

• SENSITIVITY TO MARKET CONDITIONS To assess
  sensitivity of banks to market conditions
  following areas are examined.
• The sensitivity of the banks earnings or the
  economic value of its capital to adverse changes
  in interest rate, prices and exchange rates,
• The ability of management to identify, measure,
  monitor and control exposure to market risk.

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ON-SITE BANK SUPERVISIONDuring Supervision

• After examination is completed, an exit meeting
  with BOD and general managers of the bank is
  arranged.
• During the exit meeting, examination results are
  communicated to banks officials and their
  comments are taken into consideration in the
  preparation of examination report.

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ON-SITE BANK SUPERVISIONDuring Supervision

• After examination is completed, two types of
  report are prepared
• Soundness and safety report which states whether
  the bank is operating in a sound and safe manner.
  
• Compliance report which states whether the bank
  complies with the regulations.

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ON-SITE BANK SUPERVISIONAfter Supervision

• After examination reports are prepared, they are
  submitted to Institutions Department for
  enforcement.
• Institutions Department sends the reports to the
  bank formally and the bank sends back its
  comments on reports to Institutions Department in
  a written format.
• The Banks comments on the reports are sent to
  bank auditors who prepare these reports.
• After the bank auditors communicate their
  responses to Institutions Department, on-site
  supervision is completed.

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ON-SITE BANK SUPERVISION

• THE REPORTS PREPARED by SBAs in 2003 and 2004
• Report Title Number of Report
  2003-2004
• Safety and Soundness Report 60-46
• Compliance Report 95-90
• Other Report 45-62

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ON-SITE BANK SUPERVISION

• Developments in on-site examination procedure
• A new project has been started to make on-site
  examination procedure more effective and timely,
• A new software will be designed using the latest
  technological improvements and is planned to be
  used in examination procedure in 2005,
• Risk Based Supervision project is about to
  finalize.