Credit and Counterparty Credit Risk
Credit risk management, which is a process for consistently evaluating and monitoring credit risk, is carried out within the frame of the policies approved by the Board of Directors, and covers all credit portfolios. Internal capital levels calculated using internal parameters pertaining to credit risk are monitored together with their historic performances and routine reporting is performed.
Within the scope of ICAAP and stress testing, internal capital for credit risk, credit concentration risk calculations, stress tests and scenario analyses are evaluated on an annual basis. Stress test analyzes are updated quarterly and the results are evaluated. All credit units are coordinated to assess the compliance level to the credit guide, which is then referred to relevant committees for necessary decisions and actions.
Under the asset allocation performed annually in view of risk-based return, limits are determined for credit portfolios, and approval of the Board of Directors is obtained. Under extraordinary circumstances, limits are reviewed more frequently. Internal capital thresholds and risk adjusted return target for the entire portfolio are determined and monitored within the framework of asset allocation limits. Internal capital impact analyses are performed according to updated or renewed risk parameters. Additionally, development and improvement projects are carried out for the systemic automation of calculations and analyses. Installment processes for risk-based measurement and pricing system is being carried out.
In order to rate customers in the loan portfolios using objective criteria, outputs from scorecard models and internal risk rating models, which were developed using statistical methods on historical data, are incorporated into the relevant lending policies and procedures at Garanti BBVA. The probability of default produced through models for loan portfolios, loss given default, credit conversion factor parameters are used effectively for credit allocation, authorization, internal capital, risk appetite indicator, asset allocation limits, risk- based profitability calculations, budgeting, concentration risk calculations and stress tests. In addition, provisions calculated using the outputs of models mentioned above together with other explanatory variables are monitored under IFRS9. All models and methodologies are subjected to qualitative and quantitative validation. Moreover, periodic model monitoring activities are performed and actions are taken if necessary.
COUNTERPARTY CREDIT RISK
Counterparty credit risk strategy, policy and implementation principles are defined in the policy document approved by the Board of Directors. The Bank measures, monitors and creates limit for this risk in line with this policy. The Bank uses the Internal Model Method (IMM) to measure and report the counterparty credit risk for derivative transactions, repurchase transactions, security and commodity lending in addition to using Current Exposure Method (CEM) for regulatory purposes. Within this scope, the Bank employs risk mitigation techniques through framework agreements (ISDA, CSA, GMRA, etc.), obtaining collateral and complementing margins to the extent allowed by national and international legislation. The model is validated every year.
The Bank also calculates internal capital for counterparty credit risk by way of a model that uses parameters (Rating, PD, LGD) based on the internal model. Internal counterparty credit risk internal capital calculations, stress tests and scenario analyses are conducted annually within the scope of ICAAP and stress testing.