Risk Management Policies Based on Risk Types

Credit Risk

Credit risk indicates the failure of a borrower to fulfill its capital, interest payments and other obligations, the failure of an institution exporting securities to fulfill its obligations in cash credits, and losses arising from indemnity payment by the Bank to a financing institution afforded with a guarantee or to an exporter, contractor or institution afforded with insurance cover in non-cash credits.

The risk weights of the Bank’s assets are determined within the boundaries of the regulations of the BRSA.

Loans are extended within the framework of the authority given to the Board of Directors for achieving the Bank’s sub-lending targets as set out in its annual programs.

Losses sustained by Türk Eximbank due to political risks undertaken for the sake of credit, guarantee and insurance activities are covered by the Ministry of Treasury and Finance according to Article 4/C, added to Law No. 3332 under Law No. 3659 and Law No. 4749 on the Regulation of Public Finance and Debt Management dated 28 March 2002.

International credits are granted by approval of the Board of Directors and approval of the Minister to whom the Ministry of Treasury and Finance is reporting, according to Article 10 of Act No. 4749 dated 28 March 2002 on the Regulation of Public Finance and Debt Management. The limit of a country is restricted by both the maximum risk that can be undertaken and the maximum amount that can be utilized annually.

The fundamental collateral of the international credits is the sovereign guarantee of the counter country or the guarantee of banks that Türk Eximbank accepts as accredited. Sovereign guarantee letters are regulated by the Finance or Economy Ministry related to the counter country legislations. Letters of Guarantee cover the principal, interest and all other obligations of the borrower and are valid until the maturity date. In addition to state guarantees, additional guarantees such as debt notes may be requested depending on the status of the debtor and project, the “comfort letter”, and the “deposit account” issued by the authorities of the relevant countries.

The Bank reviews various reports of the OECD on country risk classification, reports of the members of the Berne Union, and reports of independent credit rating institutions, as well as the financial statements of banks and the country reports prepared by the Bank during the assessment and review of loans granted.

Firms’ and banks’ risks and limits are monitored on daily and weekly bases by responsible units and the same can be revoked in real-time. Domestic and foreign banks’ limits are calculated using a Bank methodology, which seeks to simplify the limit amounts unnecessarily allocated and to bring them in complete alignment with Basel III Guidelines.

The risk ratings of banks are determined by analyzing financial and other indicators, such as the group to which a bank belongs, the shareholders of a bank, whether a bank is part of a financial holding company, the situation of a bank’s sister companies, whether a bank is a foreign bank, the situation of the ultimate parent company, ratings issued by international rating agencies, and evaluation of subjective criterion like management quality and information from the press.

Besides the financial and organizational information given by companies, the Bank receives intelligence from other sources (such as the Risk Centralization Records of CBRT, the Turkish Trade Registry Gazettes, the registration information from the Chamber of Commerce, data of the Ministry of Trade, banks, other companies in the same sector, etc.) for proof and for detailed research on companies. At the same time, the Bank takes into consideration the company's financial statements for the last three years, as well as the overall situation of the sector of the company in question; the economic and political circumstances of foreign target markets; and the advantages and disadvantages of the company compared to domestic and/or foreign competing companies. If the company is a subsidiary of a holding company or is a member of a group of companies, the bank loans of the group and the scenarios which may affect the activities of the group are investigated and the risk of the whole group is considered while analyzing the company.

All operations denominated in foreign currency and derivative transactions of the Bank are carried out under the limits approved by the Board of Directors. Sectoral and regional distributions of credit risks are conducted in parallel with the export composition of Türkiye, and this is monitored by the Bank regularly.

Türk Eximbank is not obliged to conform to Article 54 of Banking Law No. 5411 on loan limits. Nevertheless, the Bank obeys the general credit limit constraints mentioned in the Banking Law. As per guaranteeing policy, since credits are mostly extended based on the risk of the domestic bank, the Bank can undertake risk of up to 20% of the cash and non-cash total credit risk amount, excluding treasury transactions for a single bank, in order to fulfill its mission to provide credits depending on the economic conjuncture.

Türk Eximbank’s short-, medium- and long-term credit programs are carried out with respect to financial conditions (terms, interest rates, collaterals, etc.) and procedures approved by the Board of Directors. Credit prices are determined by the Assets and Liabilities Committee in view of the cost of funds, maturity of the transaction, structure of the collateral and variation in market interest rates are taken into consideration. The Bank’s mission to provide financing opportunities with costs that will lead exporters to gain competitive advantages in existing markets and risky or new countries is also considered during the process of pricing loans.

Each year, Türk Eximbank cedes the commercial and political risks borne under its insurance programs to a group of domestic and overseas reinsurance companies under renewed agreements. Türk Eximbank holds a certain portion of the aforementioned risks that can be indemnified from its own sources. This portion was 40% in 2021.

Premium rates for Export Credit Insurance vary according to criteria such as the risk classification of the buyer’s country, payment terms, credit tenor, the legal status and the risk group of the buyer (private or public). The premium rates get higher as the risk of the country, the buyer or the payment method increase, or the delivery term becomes longer. The quotation strategy, which is the basis for determining premium rates, is generated taking into account domestic market conditions, international quotations of export credit insurance services, and the size of accumulated losses in past years.

Short-Term Export Credits and Credits for Foreign Currency-Earning Services are granted to companies upon approval by the General Directorate Credit Committee within the guarantee determined by the Board of Directors and maturity and interest rate elements determined by the General Directorate, provided that the credit risk level that can be reached by a given firm will not be exceeded. This authorization is limited to 1% of the Bank’s equity.

The collateral required for the Pre-Shipment Export Credits Program is the Debtor Bank’s Current Account Undertaking Contract, similar to a comprehensive bond, issued by intermediary commercial banks in accordance with their respective credit limits allocated by Türk Eximbank.

The cash/non-cash domestic bank limits for the Bank's short-term TL and foreign currency credits are approved by the Board of Directors. These limits can be changed under restrictions determined by the Board of Directors.

Direct lending secured by fundamental collateral amounts to 100% of the principal, interest and export commitment risk of the loan. Fundamental collaterals include letters of bank guarantee, government securities, our Bank’s insurance policies, cash and securities pledge, mortgage and KGF guarantees.

In the Bank’s annual program, within the framework of the insurance and buyers’ credit facilities including foreign risk, the limit of a country implies the “maximum limit that can be undertaken”, and the exposure limit of a country implies “maximum amount that can be utilized annually”.

Within the framework of the authority given by the Board of Directors, up to the authorized amount of buyers’ limits are granted by the underwriting department. The higher amounts are granted directly by the Board of Directors.

The maximum amount of credit risk to which the Bank may be exposed is indicated in the Implementation Principles of relevant credits, and these amounts are determined by the decision of the Board of Directors.

While Türk Eximbank is exempted from Article 54 – Loan Limits of the Banking Law, the metrics Risk Management Department identified in relation to concentration risk are monitored in the Internal Limit and Early Warning Thresholds document approved by the Board of Directors. In addition, the concentration risk is addressed in the ICAAP report, and risk is measured using the Herfindahl-Hirschman method, which is among the methods suggested by the BRSA.

Market Risk

Market risk is defined as the probability of loss at the Bank’s on- and off-balance-sheet positions due to price, interest and exchange-rate movements arising from market fluctuations, leading to variations in income statement items and profitability of shareholders’ equity.

For measuring its market risk exposure, the Bank calculates the “Exchange Rate Risk” and the “Interest Rate Risk” based on the “Market Risk Measurement Using the Standardized Approach” issued by the BRSA (the Bank is not exposed to any equity position risk). The market risk covering the aggregate interest and exchange rate risks calculated according to the said approach is prepared and reported to the BRSA on a monthly basis, whereas the exchange rate risk calculated according to the “Regulation on Measurement and Implementation of Banks’ Net Overall FC Position / Equity Standard Ratio on a Consolidated and Unconsolidated Basis” is calculated and reported to the BRSA on a weekly basis.

Value at Risk (VaR) and Expected Shortfall are also calculated at the Bank with the aim of analyzing the amounts of potential loss that may be suffered by derivatives for trading purposes under various market conditions and of deriving statistical data in view of international finance literature.

Currency Risk

The Bank’s foreign exchange positions are monitored daily. All positions are managed by authorized personnel within the limits set out in the Risk Management Implementation Principles approved by the Bank’s Board of Directors, considering the market developments and expectations.

The Bank gives high importance to implementing the strategy of matching its assets and liabilities in terms of currency, maturity and interest. In this framework, debt management is pursued in accordance with the Bank’s asset structure to the greatest possible extent. In cases where this is not possible, the Bank tries to achieve a matching strategy using the appropriate types of swap transactions (cross-currency swaps, interest swaps or currency swaps) or by changing the asset structure of the Bank in such ways as may be possible under the given conditions.

The Bank follows a balanced strategy with respect to exchange rate risk between assets and liabilities.

The exchange rate risk for each currency is monitored separately and on a daily basis. The effects of the Bank’s activities and of market conditions on the Bank’s positions are closely monitored, and the necessary measures are taken promptly.

Interest Rate Risk

The interest structure (fixed or floating) of interest-sensitive assets and liabilities, and their weight in total assets and liabilities, are evaluated to determine the probable effects of changes in market rates on the Bank’s profitability. The Bank’s approach is that all assets and liabilities bearing fixed interest rates will be repriced at maturity, and that those bearing floating rates are at the payment terms. By using this approach, the Bank calculates the interest-sensitive gap or surplus for each period remaining to contractual reprising dates (gapping report). The gapping report is used to predict how the Bank will be affected by the probable market rate changes at any period of time provided that all assets and liabilities sensitive to interest are sorted according to the interest renewal periods.

Maturity mismatches are monitored periodically for FX-denominated assets and liabilities, and TL-denominated assets and liabilities are monitored via tables showing weighted averages of days to maturity, which are prepared periodically.

According to the Risk Management Principles approved by the Board of Directors, the Bank attaches importance to the alignment of assets and liabilities in different currencies at fixed and variable interest rates, and takes care to maintain the fixed/variable rate assets and liabilities mismatch that can be undertaken at a reasonable level, with the purpose of limiting the negative effects interest rate changes might have on the Bank’s profitability.

In accordance with the “Regulation on Calculation and Evaluation of Interest Rate Risk Arising from the Banking Accounts with Standard Shock Methods” issued by the BRSA and published in the Official Gazette, issue No. 28034, on 23 August 2011, submission of a report that is intended to act as a stress test by measuring the impact of interest rate shocks (of between +5% and -4% for lira and between +2% and -2% for foreign currencies) on the Bank’s balance sheet, has continued in 2021.

According to the regulation, the ratio of net present value changes caused by interest rate shocks on the equity of the related month must not exceed 20%.

The said ratio remains well below the legal limit owing to the Bank’s solid equity structure and the high level of match between its assets and liabilities.

Liquidity Risk

The Bank’s overall policy for liquidity risk is to carry a low-cost liquidity level at an amount sufficient to meet the potential cash flow needs under various operational conditions. Accordingly, based on existing credit stocks and existing cash, cash flow statements are being prepared, according to which additional funding needs and timing are determined.

Besides liquidity ratios, other balance sheet ratios, amount and term structure of liquid assets and rules for diversification of funding resources are all taken into consideration in liquidity management.

The Bank covers its short-term liquidity needs from short-term credits from domestic and foreign banks and short-term funds obtained through repo from money markets. Long-term liquidity need is provided from medium-long term loans obtained from international institutions such as World Bank and European Investment Bank and funds raised from capital markets through bond issuances.

The Bank tries to fund short-term credit with short-term resources and medium-long term credits with medium-long term resources and reduce the mismatch as much as possible.

In determining the overall limits of liquidity management, minimum liquidity levels and emergency liquidity resources are identified by the Board of Directors of the Bank.

In this context, legal limits as per the “Regulation on Measurement and Evaluation of Liquidity Adequacy of Banks” are considered for liquidity risk in Turkish Lira and foreign currency.

In terms of liquidity, the Bank chooses to use borrowing limits in TL and foreign currency markets as per CBRT and short-term money market borrowing limits from domestic and foreign banks in emergency situations as much as possible.

Moreover, in case of a projection or detection of an emergency situation, “Liquidity Action Plan” which is approved by the Board of Directors is applied.

Liquidity Action Plan was prepared to mitigate risks that may occur due to non-performance of liabilities resulting from liquidity squeeze and to protect rights and interests of the Bank’s shareholder, creditors and all parties which may be affected by the liquidity status and healthy management of operations.

In order to meet the urgent liquidity need, in addition to “Base Ratio to be Used in Measurement of Liquidity Risk” an additional minimum 1% of the Bank’s total assets are maintained as liquid assets. The composition of these assets is determined by Vice Presidency responsible from Treasury (assets as indicated in Article 5 of the Regulation on Measurement and Evaluation of Liquidity Adequacy of Banks).

In addition to legal liquidity obligations, the Bank’s asset and liability items are classified based on their maturities as demand, up to 1 month, 1-3 months, 3-12 months, 1-5 years, 5 year and above, and asset-liability harmony is closely monitored.

First precaution for liquidity need that may arise at an unexpected time is to keep liquid assets and/or short-term assets at a higher amount than the liabilities to be paid in the short term. In this context, the following actions are taken:

Operational Risk

Operational risk is defined as the probability of loss resulting from inadequate or failed internal processes, people and systems or from external events.

Amount subject to operational risk, which is calculated using the “Basic Indicator” approach in accordance with the BRSA regulations, is taken into consideration in calculating the Bank’s capital adequacy ratio within the scope of Basel II First Pillar risks.

In addition to regulatory reports, operational risk is also measured using internal metrics. Created using the data infrastructure classified on the basis of lines of business within the frame of improvements made with the purpose of effective management of operational risk associated with banking processes and referring to the determination of Operational Risk Limit and Early Warning thresholds, the Operational Risk Methodology Document, which is deemed appropriate by the Audit Committee and approved by the Board of Directors, went into effect.

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