Abstract
This paper presents an assessment of observance of Basel Core Principles for Effective Banking Supervision in Turkey. Since the previous assessment conducted in 2011, the Banking Regulation and Supervisory Agency has made several significant improvements to its supervisory framework. There are areas that still warrant improvement, including addressing legal provisions that undermines supervisory independence, providing a deeper risk assessment focus to supervisory inspections and follow up, enhancing the forward-looking component of the assessments, streamlining risk management and corporate governance requirements, strengthening the supervisory enforcement regime, demanding recovery plans, developing group resolution plans, and increasing the ability to act at an early stage to address unsafe and unsound practices.
List of Regulations
| Abbreviation | Name of the Regulation or Guideline |
|---|---|
| BL | Banking Law No. 5411 |
| CAFBDTS | The Communiqué on the Principles and Procedures for the Administrative Fines to be Imposed on Reportings Made within the Scope of Banking Data Transfer System |
| CAMA | Communiqué on Calculation of the Risk Weighted Exposure Amount for Operational Risk by Advanced Measurement Approach |
| CAROT | Communiqué on Principles and Procedures Concerning the Activities of Representative Offices in Turkey |
| CCFS | Communiqué on Preparation of Consolidated Financial Statements of Banks |
| CCRM | Communiqué on Credit Risk Mitigation Techniques |
| CDRM | Communiqué on Disclosures About Risk Management to be Announced to Public by Banks |
| CIRB | Communiqué on Calculation of the Risk Weighted Exposure Amount for Credit Risk by Internal-rating based Approaches |
| CITEA | Communiqué on Bank Information Systems and Banking Procedures Audits Performed by External Audit Firms |
| CITIECC | Communiqué on Principles of Information Systems Management by Information Exchange Firms, Custody Firms, and Clearing Firms and on Examination of Business Process and Information Systems |
| CMRO | Communiqué on the Calculation of Capital Requirement for Market Risk of Options, Using Standardized Approach |
| CMR-RMM | Communiqué on the Calculation of Market Risk by Risk Measurement Models and Assessment of Risk Measurement Model |
| CPD | Communiqué on the Financial Statements and Their Disclosures to be Announced to Public by Banks |
| CPITMB | Communiqué on the Principles of Information Systems Management by Banks |
| CSE | Communiqué on the Calculation of Risk Weighted Exposure Amount Related to Securitization |
| CSP | Communiqué on Structural Position |
| CUCA | Communiqué on The Uniform Chart of Accounts and its Prospectus |
| EBL | Enforcement and Bankruptcy Law |
| GAA | Guideline on The Assessment Criteria Considered in the Audits to be Performed by the Agency |
| GAPA | Guidelines on the Application Process of Internal Rating Based Approaches and Advanced Measurement Approach |
| GAVA | Guidelines on Assessment and Validation of Internal Rating Based Approaches and Advanced Measurement Approach |
| GBCP | Guideline on Best Compensation Practices |
| GCM | Guideline on Credit Management of Banks |
| GCPRM | Guideline on Counterparty Risk Management |
| GCRM | Guideline on Country Risk Management |
| GFVM | Guideline on Fair Value Measurement |
| GICAAPR | Guideline on ICAAP Report |
| GIRRM | Guideline on Interest Rate Risk Management |
| GLRM | Guideline for Liquidity Risk Management |
| GMCR | Guideline on The Management of Concentration Risk |
| GMRM | Guideline on Market Risk Management |
| GORM | Guideline on Operational Risk Management |
| GRRM | Guideline for Reputational Risk Management |
| GST | Guideline on Stress Testings to be Used by Banks in Capital and Liquidity Planning |
| RAA | Regulation on Principles and Procedures Concerning the Audit to be performed by the Banking Regulation and Supervision Agency |
| RAAVF | Regulation on the Principles regarding the Authorization and Activities of Valuation Firms |
| RAP | Regulation on the Procedures and Principles for Accounting Practices and Retention of Documents by Banks |
| RCA | Regulation on Measurement and Assessment of Capital Adequacy of Banks |
| RCB | Regulation On Capital Conservation and Countercyclical Capital Buffers |
| RCGB | Regulation on the Corporate Governance Principles of Banks |
| RCT | Regulation on Credit Transactions by Banks |
| REAB | Regulation on the External Audit of Banks |
| REOAMC | Regulation on Establishment and Operation of Asset Management Companies |
| REPL | Regulation on the Procedures and Principles for the Evaluation of loans and other receivables and Provisions |
| RFHC | Regulation on Financial Holding Companies |
| RGABCS | Regulation on Grants and Aids by Banks and Other Institutions Included in Consolidated Supervision |
| RIA | Regulation on Independent Audit |
| RICAAP | Regulation on Internal Systems and Internal Capital Adequacy Assessment Process of Banks |
| RIRRBB | Regulation on Measurement and Assessment of Interest Rate Risk in the Banking Book by Standard Shock Method |
| RITEA | Regulation on Bank Information Systems and Banking Procedures Audits Performed by External Audit Firms |
| RLA | Regulation on Measurement and Assessment of Liquidity Adequacy of Banks |
| RLCR | Regulation on Calculation of Liquidity Coverage Ratio of Banks |
| RMAL | Regulation on Measurement and Assessment of Leverage Level of Banks |
| RMSDE | Regulation on Merger, Sale, Disintegration, and Exchange of Shares |
| RNFER | Regulation on Calculation and Implementation of Net General Position of Foreign Exchange Over Own Funds Ratio for Banks on Non-Consolidated and Consolidated Basis |
| ROF | Regulation on Own funds of Banks |
| RPC | Regulation on Principles of Professional Conduct to be Observed by the Members of the BRSB and by the Staff of the BRSA |
| RPMCP | Regulation on Principles and Procedures Concerning the Trading Precious Metals and the Disposal of Commodity and Property Acquired due to Receivables |
| RPPAP | Regulation on Principles and Procedures Concerning the Preparation and Publication of Annual Report |
| RPPD | Regulation on the Procedures and Principles for Acceptance, Withdrawal and Time Limitation of Deposits and Participation Funds |
| RRA | Regulation on the Principles regarding the Authorization and Activities of Rating Agencies |
| RROS | Regulation on Receiving Outsourcing Services by Banks |
| RRRRTB | Regulation on Repo and Reverse Repo Transactions of Banks |
| RSMOD | Regulation on Declaration of the Whom to be Appointed to Managerial Position, Oath and Declaration of Property, and Holding Docket |
| RTSPIO | Regulation on Transactions Subject to Permission and Indirect Share Ownership |
| RVLB | Regulation on Voluntary Liquidation of Banks |
| SMBSP | Supervisory Manual on Banking Supervision Process |
| SMCEP | Supervisory Manual on Credit Examination Procedures |
| SMAMLCFT | Supervisory Manual on AML/CFT Issues |
| SMGAR | Supervisory Manual on General Assessment Report |
| SMIRASP | Supervisory Manual for Identifying Risky Areas and Supervision Planning |
| SMRAC | Supervisory Manual on Risk Assessment Criteria |
| Abbreviation | Name of the Regulation or Guideline |
|---|---|
| BL | Banking Law No. 5411 |
| CAFBDTS | The Communiqué on the Principles and Procedures for the Administrative Fines to be Imposed on Reportings Made within the Scope of Banking Data Transfer System |
| CAMA | Communiqué on Calculation of the Risk Weighted Exposure Amount for Operational Risk by Advanced Measurement Approach |
| CAROT | Communiqué on Principles and Procedures Concerning the Activities of Representative Offices in Turkey |
| CCFS | Communiqué on Preparation of Consolidated Financial Statements of Banks |
| CCRM | Communiqué on Credit Risk Mitigation Techniques |
| CDRM | Communiqué on Disclosures About Risk Management to be Announced to Public by Banks |
| CIRB | Communiqué on Calculation of the Risk Weighted Exposure Amount for Credit Risk by Internal-rating based Approaches |
| CITEA | Communiqué on Bank Information Systems and Banking Procedures Audits Performed by External Audit Firms |
| CITIECC | Communiqué on Principles of Information Systems Management by Information Exchange Firms, Custody Firms, and Clearing Firms and on Examination of Business Process and Information Systems |
| CMRO | Communiqué on the Calculation of Capital Requirement for Market Risk of Options, Using Standardized Approach |
| CMR-RMM | Communiqué on the Calculation of Market Risk by Risk Measurement Models and Assessment of Risk Measurement Model |
| CPD | Communiqué on the Financial Statements and Their Disclosures to be Announced to Public by Banks |
| CPITMB | Communiqué on the Principles of Information Systems Management by Banks |
| CSE | Communiqué on the Calculation of Risk Weighted Exposure Amount Related to Securitization |
| CSP | Communiqué on Structural Position |
| CUCA | Communiqué on The Uniform Chart of Accounts and its Prospectus |
| EBL | Enforcement and Bankruptcy Law |
| GAA | Guideline on The Assessment Criteria Considered in the Audits to be Performed by the Agency |
| GAPA | Guidelines on the Application Process of Internal Rating Based Approaches and Advanced Measurement Approach |
| GAVA | Guidelines on Assessment and Validation of Internal Rating Based Approaches and Advanced Measurement Approach |
| GBCP | Guideline on Best Compensation Practices |
| GCM | Guideline on Credit Management of Banks |
| GCPRM | Guideline on Counterparty Risk Management |
| GCRM | Guideline on Country Risk Management |
| GFVM | Guideline on Fair Value Measurement |
| GICAAPR | Guideline on ICAAP Report |
| GIRRM | Guideline on Interest Rate Risk Management |
| GLRM | Guideline for Liquidity Risk Management |
| GMCR | Guideline on The Management of Concentration Risk |
| GMRM | Guideline on Market Risk Management |
| GORM | Guideline on Operational Risk Management |
| GRRM | Guideline for Reputational Risk Management |
| GST | Guideline on Stress Testings to be Used by Banks in Capital and Liquidity Planning |
| RAA | Regulation on Principles and Procedures Concerning the Audit to be performed by the Banking Regulation and Supervision Agency |
| RAAVF | Regulation on the Principles regarding the Authorization and Activities of Valuation Firms |
| RAP | Regulation on the Procedures and Principles for Accounting Practices and Retention of Documents by Banks |
| RCA | Regulation on Measurement and Assessment of Capital Adequacy of Banks |
| RCB | Regulation On Capital Conservation and Countercyclical Capital Buffers |
| RCGB | Regulation on the Corporate Governance Principles of Banks |
| RCT | Regulation on Credit Transactions by Banks |
| REAB | Regulation on the External Audit of Banks |
| REOAMC | Regulation on Establishment and Operation of Asset Management Companies |
| REPL | Regulation on the Procedures and Principles for the Evaluation of loans and other receivables and Provisions |
| RFHC | Regulation on Financial Holding Companies |
| RGABCS | Regulation on Grants and Aids by Banks and Other Institutions Included in Consolidated Supervision |
| RIA | Regulation on Independent Audit |
| RICAAP | Regulation on Internal Systems and Internal Capital Adequacy Assessment Process of Banks |
| RIRRBB | Regulation on Measurement and Assessment of Interest Rate Risk in the Banking Book by Standard Shock Method |
| RITEA | Regulation on Bank Information Systems and Banking Procedures Audits Performed by External Audit Firms |
| RLA | Regulation on Measurement and Assessment of Liquidity Adequacy of Banks |
| RLCR | Regulation on Calculation of Liquidity Coverage Ratio of Banks |
| RMAL | Regulation on Measurement and Assessment of Leverage Level of Banks |
| RMSDE | Regulation on Merger, Sale, Disintegration, and Exchange of Shares |
| RNFER | Regulation on Calculation and Implementation of Net General Position of Foreign Exchange Over Own Funds Ratio for Banks on Non-Consolidated and Consolidated Basis |
| ROF | Regulation on Own funds of Banks |
| RPC | Regulation on Principles of Professional Conduct to be Observed by the Members of the BRSB and by the Staff of the BRSA |
| RPMCP | Regulation on Principles and Procedures Concerning the Trading Precious Metals and the Disposal of Commodity and Property Acquired due to Receivables |
| RPPAP | Regulation on Principles and Procedures Concerning the Preparation and Publication of Annual Report |
| RPPD | Regulation on the Procedures and Principles for Acceptance, Withdrawal and Time Limitation of Deposits and Participation Funds |
| RRA | Regulation on the Principles regarding the Authorization and Activities of Rating Agencies |
| RROS | Regulation on Receiving Outsourcing Services by Banks |
| RRRRTB | Regulation on Repo and Reverse Repo Transactions of Banks |
| RSMOD | Regulation on Declaration of the Whom to be Appointed to Managerial Position, Oath and Declaration of Property, and Holding Docket |
| RTSPIO | Regulation on Transactions Subject to Permission and Indirect Share Ownership |
| RVLB | Regulation on Voluntary Liquidation of Banks |
| SMBSP | Supervisory Manual on Banking Supervision Process |
| SMCEP | Supervisory Manual on Credit Examination Procedures |
| SMAMLCFT | Supervisory Manual on AML/CFT Issues |
| SMGAR | Supervisory Manual on General Assessment Report |
| SMIRASP | Supervisory Manual for Identifying Risky Areas and Supervision Planning |
| SMRAC | Supervisory Manual on Risk Assessment Criteria |
Introduction1
1. This assessment of the current state of implementation of the Basel Core Principles for Effective Banking Supervision (BCPs) in Turkey has been completed as a part of a Financial Sector Assessment Program (FSAP) undertaken by the International Monetary Fund (IMF) and the World Bank during 2016. It reflects the regulatory and supervisory framework in place as of the date of the completion of the assessment. It is not intended to represent an analysis of the state of the banking sector or the crisis management framework, which have been addressed in the broad exercise.
2. The Banking Regulation and Supervisory Authority (BRSA) as a member of the Basel Committee on Banking Supervision (BCBS), is committed to the adoption of international standards and sound practices promulgated by the BCBS, as well as other relevant international standard-setting bodies. The BRSA has implemented, or is in the process of implementing, all of the BCBS standards, most notably those related to capital adequacy and liquidity with a high level of compliance. The BRSA is to be commended for its ongoing commitment to adhering to the highest standards for supervision and regulation.
3. Since the previous assessment conducted in 2011, the BRSA has made several significant improvements to its supervisory framework. Turkey has built a good foundation for banking supervision. The Banking Law (BL) provides a broadly appropriate supervision framework with clear responsibilities and necessary supervisory powers. The established methodology for banking supervision is comprehensive and grounded on extensive databases and on regulation largely in compliance with international standards. The BRSA has also made vast efforts to improve consolidated supervision, organizing supervisory colleges, signing a number of important Memorandum of Understanding (MoUs) and removing obstacles for the supervision of Turkish banks operations in foreign countries.
4. There are areas that still warrant improvement. These include, among others, addressing legal provisions that undermines supervisory independence, providing a deeper risk assessment focus to supervisory inspections and follow up, enhancing the forward looking component of the assessments, streamlining risk management and corporate governance requirements, strengthening the asset quality examination process and the accuracy of classification therein, strengthening the supervisory enforcement regime, demanding recovery plans, developing group resolution plans and increasing the ability to act at an early stage to address unsafe and unsound practices.
5. The Assessment has been conducted in accordance with the revised BCP assessment methodology approved by the Basel Committee. The Turkey supervisory regime was assessed and rated against the Essential Criteria (EC). The methodology requires that the assessment be based on (i) the legal and other documentary evidence; (ii) the work of the supervisory authority; and (iii) its implementation in the banking sector. Full compliance requires that all these prerequisites are met. The guidelines allow that a country may fulfill the compliance criteria in a different manner from those suggested, as long as it can prove that the overriding objectives of each Core Principle (CP) are achieved. Conversely, countries may sometimes be required to fulfill more than the minimum standards, such as in the event of structural weaknesses in that country. The methodology also states that the assessment is to be made on the factual situation of the date when the assessment is completed. However, where applicable, the assessors made note of regulatory initiatives that have yet to be completed or implemented.
6. The conclusions are based on extensive discussions with staff members of the BRSA and a review of related regulation and internal supervisory documents. The mission reviewed the BCP self-assessment undertaken by BRSA preceding this assessment, and detailed responses to a questionnaire addressing supervisory issues. The mission also reviewed a number of laws governing banking supervision powers and activities, including the BL and a number of regulations and decisions addressing prudential standards and risk management requirements. Special attention was given to inspection reports. The mission also held meetings with senior officials of local banks, an external auditing firm and a credit rating agency. A representative from the Turkish Treasury was present at all meetings.
7. An assessment of compliance with the CP is not, and is not intended to be, an exact science. Reaching conclusions require judgments by the assessment team. Banking systems differ from one country to another, as do domestic circumstances. Also, banking activities are changing rapidly around the world after the crisis and theories, policies and best practices are evolving rapidly. Nevertheless, by adhering to a common agreed methodology, the assessment should provide the Turkish authorities with an internationally consistent measure of quality of their banking supervision relative to the 2012 revision of the Core Principles, which are internationally recognized as minimum standards.
8. The assessors appreciated the cooperation received from the BRSA. The team sincerely thanks the staff of the BRSA for their high professionalism, for the spirit of active cooperation and for making enormous efforts to attend the information requests of the team.
Institutional and Market Structure—Overview
9. The Turkish financial sector is supervised by three main regulatory and supervisory authorities. The BRSA is the regulatory and supervisory authority for the banking industry as well as financial leasing, factoring, financial holding companies, electronic money institutions, consumer financing, some payment systems institutions and asset management companies; the Capital Markets Board of Turkey (CMB) is the regulatory and supervisory authority for the securities markets; the General Directorate of Insurance and the Insurance Supervisory Board operating under the Undersecretariat of Treasury (Treasury) are responsible for the insurance sector. The other authorities that have a role in the regulation and supervision of the banking system are the Central Bank of the Republic of Turkey (CBRT) as the monetary authority, the Financial Crimes Investigation Board (MASAK) as the authority for anti-money laundering (AML) and combating financing of terrorism (CFT); and the Savings Deposit Insurance Fund (SDIF) as the deposit insurance and bank resolution authority.
10. Banks, holding over 90 percent of the financial system by asset ownership, are vital to financial stability in Turkey. Nonbank financial institutions (NBFIs) are small by peer emerging market levels, with insurance and pension fund assets constituting less than two percent each of the sector (Figure 1). Capital market intermediation remains small. The overall financial system is about 122 percent of 2015 gross domestic product (GDP) by assets and has been growing significantly faster than GDP since 2008.
11. The banking system is of average size, although the proportion of credit financed by non-deposit channels is larger than in peer emerging markets (Figure 2, panels A—B). Concentration is not significant and market share is equally distributed among private domestic, foreign-owned, and state-owned banks (Figure 2; panels C—D). Acquisition-based entry by foreign banks in recent years has led to a substantial increase in their asset ownership share. By the end of December 2015, there are 34 deposit taking banks, 5 participation banks and 13 development and investment banks under the BRSA’s supervision.
12. Capital adequacy has declined over the past five years but remains relatively high in relation to international standards (Table 1). As nonperforming loans (NPLs) have been broadly constant around some 3 percent of gross lending since 2012, the deterioration in capital adequacy and returns owes to a combination of rapid balance-sheet expansion with a reorientation of lending towards lower margin corporate lending and a policy induced squeeze on retail credit margins.
A Bank Dominated Financial Sector
Citation: IMF Staff Country Reports 2017, 046; 10.5089/9781475576894.002.A001
Source: EDSS, WEO, IMF FSI Annex, and World Bank FinStatsNotes: A)-(B) Financial sector assets-to-GDP; (C) Assets-to-total financial sector assets; (D) Pension fund assets-to-GDP; (E) Life insurance premiums-to-GDP; (F) Non-life insurance premiums-to-GDP.
A Bank Dominated Financial Sector
Citation: IMF Staff Country Reports 2017, 046; 10.5089/9781475576894.002.A001
Source: EDSS, WEO, IMF FSI Annex, and World Bank FinStatsNotes: A)-(B) Financial sector assets-to-GDP; (C) Assets-to-total financial sector assets; (D) Pension fund assets-to-GDP; (E) Life insurance premiums-to-GDP; (F) Non-life insurance premiums-to-GDP.A Bank Dominated Financial Sector
Citation: IMF Staff Country Reports 2017, 046; 10.5089/9781475576894.002.A001
Source: EDSS, WEO, IMF FSI Annex, and World Bank FinStatsNotes: A)-(B) Financial sector assets-to-GDP; (C) Assets-to-total financial sector assets; (D) Pension fund assets-to-GDP; (E) Life insurance premiums-to-GDP; (F) Non-life insurance premiums-to-GDP.
A Mid-sized Banking System Characteristics
Citation: IMF Staff Country Reports 2017, 046; 10.5089/9781475576894.002.A001
Source: World Bank FinStats and BRSA.
A Mid-sized Banking System Characteristics
Citation: IMF Staff Country Reports 2017, 046; 10.5089/9781475576894.002.A001
Source: World Bank FinStats and BRSA.A Mid-sized Banking System Characteristics
Citation: IMF Staff Country Reports 2017, 046; 10.5089/9781475576894.002.A001
Source: World Bank FinStats and BRSA.Table 1.Sources: IMF FSI, BIS, and IMF staff calculations.
Turkey Financial Soundness Indicators (FSI)
Non FX adjusted.
Net of NPL provisions.
As provided by BRSA.
Current year data are annualized using 12 months rolling sums.
Proxied by T1 Capital over last 2 months average balance sheet assets and average off-balance sheets exposures (> 3 percent).
Including FX-indexed assets and liabilities.
Table 1.
Sources: IMF FSI, BIS, and IMF staff calculations.
Turkey Financial Soundness Indicators (FSI)
| 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | |||
|---|---|---|---|---|---|---|---|---|
| Balance Sheet | Percent of GDP | |||||||
| Total Assets | 91.6 | 93.8 | 96.7 | 110.5 | 114.1 | 118.1 | ||
| o/w Gross Loans | 47.9 | 52.6 | 56.1 | 66.8 | 71.0 | 74.4 | ||
| Liabilities | 79.4 | 82.7 | 83.9 | 98.2 | 100.9 | 105.0 | ||
| o/w Deposits | 56.2 | 53.6 | 54.5 | 60.3 | 60.2 | 62.4 | ||
| Shareholders’ Equity | 12.2 | 11.1 | 12.8 | 12.4 | 13.3 | 13.1 | ||
| Asset Quality | Percent | |||||||
| NPLs / Gross Loans | 3.7 | 2.7 | 2.9 | 2.8 | 2.9 | 3.1 | ||
| Provisions / Gross NPLs | 83.8 | 79.4 | 75.2 | 76.3 | 73.9 | 74.6 | ||
| Credit Growth (YoY) 1/ | 33.9 | 29.9 | 16.4 | 31.8 | 18.5 | 19.7 | ||
| Profitabiity | ||||||||
| Total Interest Income / Interest Bearing Assets (Avg.)2/3/ | 9.2 | 8.2 | 9.1 | 7.6 | 7.9 | 7.8 | ||
| Interest Margin / Gross Income | 62.5 | 65.2 | 64.4 | 65.4 | 68.1 | 75.3 | ||
| Non-interest Expenses / Gross Income | 46.3 | 46.5 | 41.7 | 51.6 | 49.8 | 52.1 | ||
| ROAA 3/ | 2.5 | 1.7 | 1.8 | 1.6 | 1.3 | 1.2 | ||
| ROAE 3/ | 20.1 | 15.5 | 15.7 | 14.2 | 12.3 | 11.3 | ||
| Funding and Liquidity | ||||||||
| Loan-to-Deposit ratio | 85.2 | 98.2 | 102.9 | 110.7 | 117.9 | 119.2 | ||
| Loan-to-Deposit ratio (TL) | 88.5 | 105.4 | 113.1 | 126.7 | 133.2 | 141.6 | ||
| Loan-to-Deposit ratio (FX) | 77.4 | 84.1 | 82.0 | 83.8 | 91.9 | 89.0 | ||
| Leverage Ratio 4/5/ | 6.2 | 5.3 | 5.0 | 5.2 | 5.7 | 5.3 | ||
| Liquid Assets / Assets | 28.2 | 26.2 | 26.0 | 24.3 | 23.3 | 21.6 | ||
| Liquid Assets / Short Term Liabilities | 79.7 | 72.0 | 76.0 | 72.1 | 77.4 | 73.8 | ||
| Capital Adequacy | ||||||||
| CAR | 19.0 | 16.6 | 17.9 | 15.3 | 16.3 | 15.6 | ||
| CT1R | 17.0 | 14.9 | 15.1 | 13.0 | 13.9 | 13.2 | ||
| RWA / Assets | 72.0 | 78.4 | 80.2 | 84.3 | 83.4 | 83.5 | ||
| FX Risk | ||||||||
| FX Assets / FX Liabilities (on-balance sheet) 6/ | 84.0 | 83.7 | 85.9 | 82.5 | 82.8 | 84.5 | ||
| NOP / Regulatory Capital | 0.1 | 0.4 | 2.0 | −0.6 | −2.2 | 1.3 | ||
| NOP before hedging / Regulatory Capital | −15.6 | −21.2 | −14.0 | −28.9 | −28.5 | −30.0 | ||
| House Price Index (THPL 2010=100) | 100.0 | 110.2 | 123.1 | 138.7 | 158.8 | 188.0 | ||
Non FX adjusted.
Net of NPL provisions.
As provided by BRSA.
Current year data are annualized using 12 months rolling sums.
Proxied by T1 Capital over last 2 months average balance sheet assets and average off-balance sheets exposures (> 3 percent).
Including FX-indexed assets and liabilities.
Table 1.
Sources: IMF FSI, BIS, and IMF staff calculations.
Turkey Financial Soundness Indicators (FSI)
| 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | |||
|---|---|---|---|---|---|---|---|---|
| Balance Sheet | Percent of GDP | |||||||
| Total Assets | 91.6 | 93.8 | 96.7 | 110.5 | 114.1 | 118.1 | ||
| o/w Gross Loans | 47.9 | 52.6 | 56.1 | 66.8 | 71.0 | 74.4 | ||
| Liabilities | 79.4 | 82.7 | 83.9 | 98.2 | 100.9 | 105.0 | ||
| o/w Deposits | 56.2 | 53.6 | 54.5 | 60.3 | 60.2 | 62.4 | ||
| Shareholders’ Equity | 12.2 | 11.1 | 12.8 | 12.4 | 13.3 | 13.1 | ||
| Asset Quality | Percent | |||||||
| NPLs / Gross Loans | 3.7 | 2.7 | 2.9 | 2.8 | 2.9 | 3.1 | ||
| Provisions / Gross NPLs | 83.8 | 79.4 | 75.2 | 76.3 | 73.9 | 74.6 | ||
| Credit Growth (YoY) 1/ | 33.9 | 29.9 | 16.4 | 31.8 | 18.5 | 19.7 | ||
| Profitabiity | ||||||||
| Total Interest Income / Interest Bearing Assets (Avg.)2/3/ | 9.2 | 8.2 | 9.1 | 7.6 | 7.9 | 7.8 | ||
| Interest Margin / Gross Income | 62.5 | 65.2 | 64.4 | 65.4 | 68.1 | 75.3 | ||
| Non-interest Expenses / Gross Income | 46.3 | 46.5 | 41.7 | 51.6 | 49.8 | 52.1 | ||
| ROAA 3/ | 2.5 | 1.7 | 1.8 | 1.6 | 1.3 | 1.2 | ||
| ROAE 3/ | 20.1 | 15.5 | 15.7 | 14.2 | 12.3 | 11.3 | ||
| Funding and Liquidity | ||||||||
| Loan-to-Deposit ratio | 85.2 | 98.2 | 102.9 | 110.7 | 117.9 | 119.2 | ||
| Loan-to-Deposit ratio (TL) | 88.5 | 105.4 | 113.1 | 126.7 | 133.2 | 141.6 | ||
| Loan-to-Deposit ratio (FX) | 77.4 | 84.1 | 82.0 | 83.8 | 91.9 | 89.0 | ||
| Leverage Ratio 4/5/ | 6.2 | 5.3 | 5.0 | 5.2 | 5.7 | 5.3 | ||
| Liquid Assets / Assets | 28.2 | 26.2 | 26.0 | 24.3 | 23.3 | 21.6 | ||
| Liquid Assets / Short Term Liabilities | 79.7 | 72.0 | 76.0 | 72.1 | 77.4 | 73.8 | ||
| Capital Adequacy | ||||||||
| CAR | 19.0 | 16.6 | 17.9 | 15.3 | 16.3 | 15.6 | ||
| CT1R | 17.0 | 14.9 | 15.1 | 13.0 | 13.9 | 13.2 | ||
| RWA / Assets | 72.0 | 78.4 | 80.2 | 84.3 | 83.4 | 83.5 | ||
| FX Risk | ||||||||
| FX Assets / FX Liabilities (on-balance sheet) 6/ | 84.0 | 83.7 | 85.9 | 82.5 | 82.8 | 84.5 | ||
| NOP / Regulatory Capital | 0.1 | 0.4 | 2.0 | −0.6 | −2.2 | 1.3 | ||
| NOP before hedging / Regulatory Capital | −15.6 | −21.2 | −14.0 | −28.9 | −28.5 | −30.0 | ||
| House Price Index (THPL 2010=100) | 100.0 | 110.2 | 123.1 | 138.7 | 158.8 | 188.0 | ||
Non FX adjusted.
Net of NPL provisions.
As provided by BRSA.
Current year data are annualized using 12 months rolling sums.
Proxied by T1 Capital over last 2 months average balance sheet assets and average off-balance sheets exposures (> 3 percent).
Including FX-indexed assets and liabilities.
Preconditions for Effective Banking Supervision
Macroeconomic and Financial Sector Policies
13. The financial sector operates in an uncertain economic environment. Growth is dependent on external finance. During 2016, domestic demand and growth are expected to remain relatively robust due to a 30 percent minimum wage increase, relaxation of macro prudential regulations, and accommodative monetary and fiscal policies. Nevertheless, the domestic savings rate is low, creating a dependence on external funds and making the economy vulnerable to external shocks. Inflation has also remained high and above target.
14. External imbalances demand attention. While the oil price decline and economic slowdown have attenuated the current account deficit, it is expected to rise again if these factors reverse going forward. It may rise also if term premia and funding costs decompress as the U.S. begins monetary policy normalization. Against this backdrop, the external position demands attention. External debt is high (at about 60 percent of GDP) and concentrated in private sector hands, annual financing needs are high (about 27 percent of GDP), capital inflows are mainly short-tenor and debt creating, the net international investment position (NIIP), at about -50 percent of GDP is weak by international standards, and net foreign exchange (FX) reserves, at US$29 billion, are low.
15. Macroprudential policies are coordinated through the Financial Stability Committee (FSC). The FSC is composed of the heads of all the major agencies having a stake in the maintenance of financial stability; viz., the Undersecretary of Treasury and the heads of the CBRT, BRSA,CMB and SDIF, under the chairmanship of the Deputy Prime Minister in charge of the Undersecretariat of the Treasury. The 2015 Financial Stability Board (FSB) Peer Review concluded that the FSC has helped to promote information sharing and the exchange of views as well as to coordinate some policy measures among its member institutions. Importantly, the authorities have a broad range of tools at their disposal and have used them in a proactive and flexible manner in recent years to slow down the rise in household leverage and to encourage banks to increase core funding. At the same time, further steps were identified to strengthen the framework in a number of areas such as integrating the systemic risk assessment and policy framework and improving institutional arrangements and public communication.
Public Infrastructure
16. Business laws are based on the Civil Law, dated 8/2001 and the New Turkish Commercial Code (TCC), dated July, 2012. The Code of Obligations, 2011, and the Competition Law, No. 4054, 1994, also form the framework of business laws as do the Law on the Protection of the Consumer No. 6502, 2014, and the Execution and Bankruptcy Code (EBC) of 1932 (amended 2003/4).
17. The New TCC was promulgated 2012. The New TCC aims to harmonize the Turkish and European Union Laws in order to strengthen foreign economic relations. One of the new features increased transparency by requiring stock companies to create a website dedicated to publishing all data relevant for shareholders, such as annual and interim financial statements and audit reports. The new TCC also aimed to reinforce the rights of shareholder and corporate governance.
18. The basic principles of the independence of courts and security of judges and public prosecutors are provided in the Constitution. The Turkish legal system does not provide for special courts for dealing with bank or financial sector related cases, however in some big cities specific courts are identified to deal only with banking related cases.
19. All listed and non-listed companies are obliged to apply financial reporting standards issued by the Public Oversight Accounting and Auditing Standards Authority (POA). POA issues Turkish Accounting Standards (TAS) and Turkish Financial Reporting Standards (TFRS) which correspond, respectively, to the International Accounting Standards (IAS) and the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). The authorities explained that the main difference between the implementation of IFRS and TFRS in Turkish banks is in loan loss provisioning. For loan loss provisioning, the Turkish banks apply the BRSA’s REPL instead of the impairment requirements of TAS 39 or IAS 39. The BRSA is planning to apply IFRS 9, including the provision rules, from 1 January 2017. By 2017, Turkish banks will be able to recognize provisions for credit losses in accordance with TFRS 9 which is considered by the Turkish authorities to be fully compliant with the IFRS 9 with the option of the recent amendments to the REPL. The last amendment entitles the banks to use existing provisions of the REPL or to apply TFRS 9. The auditing of companies is carried out in compliance with international auditing standards by independent auditors who meet the professional competence requirements.
20. The companies which are subject to independent audit are determined in the TCC. In addition, the companies which fall under the Capital Markets Law or the BL are automatically subject to the independent auditing requirement, whereas the companies such as the license holding companies operating under the regulations of the Energy Market Regulatory Authority and public companies under the Capital Markets Law are subject to the independent auditing requirement only if they meet certain criteria. The external auditing firms which meet the required criteria are authorized by POA. On the other hand, external audit activities conducted in banks and other financial institutions are also subject to the BL and REAB.
21. Payment and settlement systems in Turkey are well developed with a sound legal and regulatory framework and with the roles of regulators and overseers clearly established. The Overseers of the FMIs in Turkey are the CBRT and the CMB. In addition, the BRSA has responsibility for payment services, payment institutions, and electronic money. The authorities have been systematically reforming the National Payments System in Turkey covering implementation of the necessary infrastructure, internal organization arrangements and strengthening the legal and regulatory framework, and have achieved several critical National Payments System (NPS) objectives—most notably, as the result of on-going modernization efforts. A conducive legal and regulatory framework and the core components of the NPS are in place.
22. There is one credit bureau operating in Turkey. The Credit Registry Bureau, (CRB-KKB) was founded in 1995 as a private enterprise with the initiative of The Banks Association of Turkey (BAT) and partnership of 11 leading banks of the sector to facilitate the exchange of information and documents between credit institutions and financial institutions. Banking Law no: 5411 Article 73/4 grants special permission to the CRB to collect information from member institutions and to facilitate exchange of this information. In order to gather risk information about customers of credit institutions and other financial institutions, the Risk Center was established as a part of BAT in 2012. BAT and CRB signed a service contract, with the approval of the BRSA, in order to carry out all operations of the Risk Center in December 2012.
23. Statistical information availability is extensive in the Turkish banking system. The BRSA publishes regularly (weekly, monthly, quarterly, annual) data on bank and non-bank financial institutions. Data cover balance sheet, income statement, loans, consumer loans, SME loans, as well as deposits by type and maturity. Also fees and commissions faced by financial customers are also published on BRSA’s web site as a tool to strengthen market discipline. Deposit interest rates and price quotes about financial markets are available on a daily basis and are provided by related monetary, banking and financial market regulators.
24. The banking supervisor works closely with the deposit insurer and central bank on crisis management issues. The previous FSAP mission highlighted the broad range of measures that the BRSA has at its disposal to mitigate bank vulnerabilities, found the CBRT’s framework for the provision of emergency liquidity to be sound and characterized the SDIF as broadly conforming to best international practice. The 2015 FSB Peer Review for Turkey,2 found that the absence of certain resolution powers—such as bridge banks, bail-in powers and temporary stays of early termination rights—may make it difficult for the authorities to resolve the largest banks in the system in a timely and cost-effective manner. The review also pointed out that, impediments to cross-border cooperation can challenge the effective resolution of banks with cross-border operations, while a lack of recovery and resolution planning requirements undermines resolution preparedness. The Turkish authorities have informed the mission that they are currently working to align the Turkish resolution framework with the FSB Key Attributes for Resolution Regimes.
Detailed Assessment
A. Supervisory Powers, Responsibilities, and Functions
| Principle 1 | Responsibilities, objectives and powers. An effective system of banking supervision has clear responsibilities and objectives for each authority involved in the supervision of banks and banking groups.3 A suitable legal framework for banking supervision is in place to provide each responsible authority with the necessary legal powers to authorize banks, conduct ongoing supervision, address compliance with laws and undertake timely corrective actions to address safety and soundness concerns.4 | |||||||||||||||||||||
| Essential criteria | ||||||||||||||||||||||
| EC1 | The responsibilities and objectives of each of the authorities involved in banking supervision5 are clearly defined in legislation and publicly disclosed. Where more than one authority is responsible for supervising the banking system, a credible and publicly available framework is in place to avoid regulatory and supervisory gaps. | |||||||||||||||||||||
| Description and findings re EC1 | The Banking Law No. 5411 (BL) establishes the BRSA as being responsible for the supervision and regulation of the banking industry as well as financial leasing, factoring and consumer financing companies in Turkey. The other authorities that have a role in the regulation and supervision of the financial system are:
Responsibilities of each entity are well established with small room for overlap or regulatory gap. | |||||||||||||||||||||
| EC 2 | The primary objective of banking supervision is to promote the safety and soundness of banks and the banking system. If the banking supervisor is assigned broader responsibilities, these are subordinate to the primary objective and do not conflict with it. | |||||||||||||||||||||
| Description and findings re EC2 | Article 93 of the BL establishes that the BRSA is responsible “for the establishment of confidence and stability in financial markets, the sound operation of the credit system, the development of the financial sector and the protection of the rights and interests of depositors”. The BL also obligates the BRSA “to prevent any transaction and practice that could endanger the rights of the depositors and the sound and safe operation of banks and severely damage the economy; and to take and implement the decisions and measures in order to ensure the efficient operation of the credit system”. The concept of “sound operation of the credit system” is not further developed. Nevertheless, considering the role of the BRSA in the development of the financial sector, article 94 of the BL states that the BRSA should ensure the profitable, efficient and rational operation of banks; ensure competitiveness of the financial system; closely following up the status of international banks in terms of supervision; ensure the integration of professional in the financial market; and prepare the regulations pertaining to financial markets. The BL does not distinguish among the objectives and seems to assign the same hierarchy to the financial stability and development of the financial sector objectives. The assessors noted that some BRSA decisions (e.g., loan loss provisions for some products, loan restructuring rules) might be interpreted as rules that aim primarily to support financial development objectives, despite the fact that the BRSA considers that some of them are within the scope of macroprudential policy. | |||||||||||||||||||||
| EC3 | Laws and regulations provide a framework for the supervisor to set and enforce minimum prudential standards for banks and banking groups. The supervisor has the power to increase the prudential requirements for individual banks and banking groups based on their risk profile6 and systemic importance.7 | |||||||||||||||||||||
| Description and findings re EC3 | The BL empowers BRSA to set and enforce minimum prudential standards. The BL (art. 43) also states that the Board is authorized to set more cautious different minimum or maximum standard ratios or limits from those set for each bank or banking groups or to change the calculation and reporting periods, or to set ratios or limits that have not been set in general terms. This provision is applicable both on a consolidated and non-consolidated basis. Please refer to CP16 for example of practical application of these powers. According to article 7 of Regulation On The Procedures And Principles For The Audit To Be Made By The Banking Regulation And Supervision Agency (RAA) and also the RICAAP the Board of BRSA has the power to publish guidelines to inform on best practices expected from banks and on the evaluation criteria that will be considered on examinations carried out by the agency. These guidelines follow the principle of proportionality in the sense that banks are expected to implement the principles according to the banks’ own scales, risk profiles, activities, volume, nature and complexity of their business and transactions. | |||||||||||||||||||||
| EC4 | Banking laws, regulations and prudential standards are updated as necessary to ensure that they remain effective and relevant to changing industry and regulatory practices. These are subject to public consultation, as appropriate. | |||||||||||||||||||||
| Description and findings re EC4 | The BL was established in 2005 and has been updated several times. The BRSA is authorized to issue regulations and communiqués through Board decisions to ensure that all rules and regulations remain effective and relevant to changing industry and regulatory practices. The agency has done so frequently to implement international standards, including Basel II/III, and update the regulation appropriately. According to the BL, the drafts of the secondary legislation (regulation and communiqués) prepared by the BRSA need to be made public for a minimum seven days consultation period to inform the public opinion and collect suggestions. In practice the period is usually longer. | |||||||||||||||||||||
| EC5 | The supervisor has the power to:
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| Description and findings re EC5 | On access to banks, the BL (art. 43, 93, 95) empowers the BRSA to have access to banks and banking group’s information for supervisory purposes. Banks are required to provide the BRSA, timely and properly, any consolidated and non-consolidated information, document, report or financial statements. The documents should be consistent with their accounts and record keeping systems, within the framework set forth by the BRSB. BRSA supervisors also have access to the staff of the banks including the board of directors. On review the overall activities of the banking group, reporting and supervision requirements prescribed in the regulations covers consolidated activities of banks, including their cross-border activities. According to article 96 of the BL, the regulated institutions and their shareholders and subsidiaries shall provide the BRSA with any information and document, including those classified as confidential, if requested by the BRSA. The requirements include parent banks as well as their domestic and foreign subsidiaries, their jointly-controlled undertakings, their branches and representative offices. On the supervision of foreign banks, Turkish banking legislation, does not separate regulatory and supervisory framework according to ownership. In this context, foreign banks established and operating in Turkey are subject to the same prudential, supervisory and regulatory rules applied to domestic banks. | |||||||||||||||||||||
| EC6 | When, in a supervisor’s judgment, a bank is not complying with laws or regulations, or it is or is likely to be engaging in unsafe or unsound practices or actions that have the potential to jeopardize the bank or the banking system, the supervisor has the power to:
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| Description and findings re EC6 | The BL provides the BRSA a broad range of tools that can be applied according to the severity of the situation. The definitions of situations when corrective actions can be taken allow for timely supervisory action. Actions that could be taken include revoking the bank’s license and triggering resolution. There are protocols that allow supervisors to coordinate with resolution authorities. Article 67 of the BL establishes that remedial action shall be taken against a bank when:
When the bank fails to implement the determined corrective measures the agency may require the bank’s board of directors to take and promptly implement any measure, including the following:
In addition, according to protocol signed between the BRSA and the SDIF, the BRSA notifies the SDIF that a bank has been required to take corrective, rehabilitative, or restrictive measures (Articles 68, 69, and 70). The timely notification allows SDIF to develop a Resolution Action Plan. Please also refer to CP3. Please also refer to CP11 for additional discussion on the use of these powers in practice. | |||||||||||||||||||||
| EC7 | The supervisor has the power to review the activities of parent companies and of companies affiliated with parent companies to determine their impact on the safety and soundness of the bank and the banking group. | |||||||||||||||||||||
| Description and findings re EC7 | The BL provides powers for the BRSA to supervise both banks and controlling parents of the bank. Supervision is performed on a consolidated and non-consolidated basis. Article 96 of the BL includes among those obligated to provide information the shareholders of the banks and banking groups therefore including parent companies. | |||||||||||||||||||||
| Assessment of Principle 1 | Largely Compliant. | |||||||||||||||||||||
| Comments | The BL provides a broadly appropriate framework for regulating and supervising banks. It also provides clear responsibilities and adequate powers to the BRSA. However, the lack of appropriately defined hierarchy among the objectives of financial stability and development of the financial sector may cause potential conflicts and be harmful to the safety and soundness of banks. The assessors noted that some BRSA decisions (e.g., differentiations in loan loss provisions and loan restructuring rules) might be interpreted as rules that aim primarily to support financial development objectives. Such measures might hinder the reputation of the supervisors and convey the message of forbearance. In order to be fully compliant with this principle the objective of development of the financial sector should be explicitly subordinated to financial stability in the BL. | |||||||||||||||||||||
| Principle 2 | Independence, accountability, resourcing and legal protection for supervisors. The supervisor possesses operational independence, transparent processes, sound governance, budgetary processes that do not undermine autonomy and adequate resources, and is accountable for the discharge of its duties and use of its resources. The legal framework for banking supervision includes legal protection for the supervisor. | |||||||||||||||||||||
| Essential criteria | ||||||||||||||||||||||
| EC1 | The operational independence, accountability and governance of the supervisor are prescribed in legislation and publicly disclosed. There is no government or industry interference that compromises the operational independence of the supervisor. The supervisor has full discretion to take any supervisory actions or decisions on banks and banking groups under its supervision. | |||||||||||||||||||||
| Description and findings re EC1 | Article 82 of the BL explicitly states that the BRSA: - has been established as a public legal person with administrative and financial autonomy; - shall independently perform and use the regulatory and supervisory duties and rights assigned thereto by the BL and the applicable legislation, under its own responsibility; − shall independently use the financial resources allocated thereto within the framework of the related laws, to the extent its duties and powers necessitate within the framework of the principles and procedures set out in its own budget; - shall employ adequate number of personnel with required qualifications in order to efficiently fulfill its duties and powers. However, the BL also establishes a few provisions that might undermine independence in practice. Article 93 requires the BRSA to consult the related Ministry (Deputy Prime Minister), before putting into force regulatory procedures other than internal regulations, in order to check the harmony with the sector strategy and policies. Furthermore, the BL also allows the relevant ministry to challenge BRSA’s regulatory decisions, allowing it to file a lawsuit for the cancelation of the BRSA Boards’ regulatory decisions (art. 105). The BRSA has informed the assessors that there is a draft amendment to the BL proposing the revocation of article 105. On accountability and governance, the BRSA must brief the Council of Ministers regarding its policies every six months. The Agency must also inform the Plans and Budget Commission of the Turkish Grand National Assembly about its activities annually. The BL (art. 97) also determines the BRSA to publish quarterly reports regarding the developments in the financial sector as well as regular reports regarding the aggregated performance of the financial institutions. Nevertheless, the assessors did not see evidence of transparent scrutiny of the BRSA activities in relation to its goals and responsibilities, i.e., a third part aiming to ensure that the powers delegated to the BRSA are exercised appropriately and that its operations are effective and in line with its mandates and objectives. | |||||||||||||||||||||
| EC2 | The process for the appointment and removal of the head(s) of the supervisory authority and members of its governing body is transparent. The head(s) of the supervisory authority is (are) appointed for a minimum term and is removed from office during his/her term only for reasons specified in law or if (s)he is not physically or mentally capable of carrying out the role or has been found guilty of misconduct. The reason(s) for removal is publicly disclosed. | |||||||||||||||||||||
| Description and findings re EC2 | The governing body of the BRSA is the board (BRSB) whose seven members including one Chairman, (also the Chairman of the BRSA), and one Deputy Chairman (co-Chairman) who are appointed by the Council of Ministers. The BL (Art. 84) establishes requirements for appointment of the members of the Board. Board members should broadly meet the same conditions required for the founders of a private bank and, additionally, cannot hold shares of the entities related to the sectors which are under the regulatory and supervisory scope of the BRSA, engage in commerce, carry out stock exchange transactions or to be directors or members of the board of auditors of any company (Art. 86). Detailed obligations, prohibitions, incompatibilities, and liabilities are established in the Regulation on Principles of Professional Conduct to be Observed by the Members of the Banking Regulation and Supervision Board and by the Staff of the Banking Regulation and Supervision Agency, which binds the BRSB members and the BRSA employees by rules on impartiality, conflicts of interest, confidentiality, compatible activities outside the BRSA, acceptance of gifts as well as principles to be observed while leaving the BRSA. The chairman and/or members of the BRSB are appointed for a 5 years term that can be renewed once (BL, art. 85). The conditions for board members being removed from office are established in the BL and cover issues such as medical conditions or not being able to meet conditions for appointment. The removal depends upon approval of the Prime Minister, but the law does not require the disclosure of the reasons. | |||||||||||||||||||||
| EC3 | The supervisor publishes its objectives and is accountable through a transparent framework for the discharge of its duties in relation to those objectives.8 | |||||||||||||||||||||
| Description and findings re EC3 | According to Article 88 of the BL, the BRSB is responsible for determining the strategic plan, performance criteria, goals and objectives of the BRSA. The planning process comprises of the determination of the goals, objectives and methods of the institution including the human and financial resources. The resulting plan is published every three years. The accountability arrangements are established in the BL. The BRSA must prepare and submit an annual report of its activities to the Council of Ministers (art. 97). The report that covers goals, organizational structure, regulatory and supervisory activities and agency resources among other issues should be published in conjunction to its audit final accounts. The BRSA is also required to inform the Plans and Budget Commission of the Turkish Grand National Assembly about its activities once a year. As explained in EC1, the assessors did not see evidences of independent and transparent scrutiny of the BRSA activities. | |||||||||||||||||||||
| EC4 | The supervisor has effective internal governance and communication processes that enable supervisory decisions to be taken at a level appropriate to the significance of the issue and timely decisions to be taken in the case of an emergency. The governing body is structured to avoid any real or perceived conflicts of interest. | |||||||||||||||||||||
| Description and findings re EC4 | The BL establishes the BRSB as the decision-making organ of the BRSA. The Board main duties and powers are: - take corrective, rehabilitating and restrictive measures against banks; - revoke the operation permission of Banks; -prepare the secondary legislation in harmony with the international standards and principles regarding the sector or area which they are authorized to regulate and supervise and take decisions to this effect; - set the strategic plan, performance criteria, goals and objectives and service quality standards of the Agency; to establish the human resources and working policies; to provide suggestions regarding the Agency’s service units and their duties; - debate and decide on the proposed budget of the Agency that is prepared in tune with the Agency’s strategic plan and goals and objectives; The chairman, who is the top rank manager of the Agency, is responsible for administering and representing the Agency. The Chairman may assign some of his duties and powers, which are not related to the Board, to his subordinates, provided that the boundaries of such assignment are clearly put down in writing. In practice, important decisions such as granting or revoking a bank’s license, significant changes in a bank’s ownership structure and imposing severe measures to a bank are taken by the BRSA Board. The level of the decisions to be taken is determined in the BL and in sub regulations. Operationally, all supervisory findings that might demand an action by the BRSA are sent to the enforcement department which analyzes the available evidence and suggests an action to the Board or other competent body. Please refer to EC2 to information on conflict of interest. | |||||||||||||||||||||
| EC5 | The supervisor and its staff have credibility based on their professionalism and integrity. There are rules on how to avoid conflicts of interest and on the appropriate use of information obtained through work, with sanctions in place if these are not followed. | |||||||||||||||||||||
| Description and findings re EC5 | Board members and agency personnel are subject to regulation on Professional and Ethical Principles that aims to ensure professionalism and integrity. The principles provide, for example, rules regarding impartiality, conflicts of interest, confidentiality, compatible activities outside the BRSA, acceptance of gifts as well as principles to be observed while leaving the BRSA. Additionally, the BL states that the Board chairman and other personnel shall not disclose confidential information regarding the Agency to any person even if they leave the office. Also according to Article 92 professional staff cannot assume for at least two years any duty in a bank where they conducted on-site and off- site supervision process or practice during the past two years. Banks expressed their respect for the professionalism and integrity of the BRSA staff. | |||||||||||||||||||||
| EC6 | The supervisor has adequate resources for the conduct of effective supervision and oversight. It is financed in a manner that does not undermine its autonomy or operational independence. This includes:
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| Description and findings re EC6 | The expenses of the BRSA are financed from contributions paid by the supervised institutions. The amount collected as contribution cannot exceed three per ten thousand of the total assets of the institutions. Excess revenues of the Agency at the end of the financial year are transferred to the general budget. The ratio, decided by the BRSA board, is substantially below the limit, given the agency room for maneuvering. The BRSA staff on supervisory functions number grew from approximately 220 in 2013 to 265 in 2015 mainly due to the creation of the Department of Information Systems Compliance and the Department of Data and System management. Also refer to CP 9. BRSA personnel can be hired under contract or permanent position. Senior management, including Vice chairmen, department heads, directors, chairman’s advisors and the professional staff are employed under contracts signed for their positions. This arrangement exempts their remuneration from following the Civil Servants Law. Board Chairman shall be paid a monthly salary that is equal to the amount of financial and social rights paid to the Prime Ministry Undersecretary. The remuneration of Board members is equal to ninety-five percent of the Board Chairman. The salaries and other social and financial rights of the permanent contracted personnel of the Agency are determined by the Board, on the condition that they will not be more than the maximum amount indicated to the chairman. BRSA non contractual personnel follow the public sector salary scales. The salary level tends to be lower than the private sector especially for the middle and upper management levels. The average compensation at the entry level is higher than the private sector. The BRSB is empowered to hire new employees observed the limits fixed by the BL. The BL limits are reasonably higher than the current staff, allowing room for additional staff if the Agency consider necessary. Entry conditions are not attractive for mid-career professionals that provides practical constraints to the hiring of experienced staff. In practice new hires are mostly recently graduate professionals that are trained in the agency. The absence of an effective option to recruit mid-career staff might represent a challenge particularly if the agency loses a substantial number of experienced staff. The BRSA has a budget and a program for regular training of the staff. Records show a comprehensive number of trainings activities in terms of topics and number of participants that were developed domestically and abroad. Technology expenditures are made to keep the staff equipped with the tools needed to supervise the banking industry. BRSA has memberships at online learning environments, market data providers (Reuters, Bloomberg and etc.) and buys specialized hardware and software (about reporting systems, risk measurement tools etc.) to supervise the industry. The BRSA explained that the travel budget is adequate for their supervisory work and cooperation initiatives with other supervisors. As an example, it mentioned that BRSA staff represents BRSA in a number of committees and subgroups of the Financial Stability Board and the Basel Committee. The BRSA also claimed that adequate resources are allocated for the participation in supervisory colleges and on-site supervision of subsidiaries abroad. | |||||||||||||||||||||
| EC7 | As part of their annual resource planning exercise, over the short- and medium-term, taking into account relevant emerging supervisory practices. Supervisors review and implement measures to bridge any gaps in numbers and/or skill-sets identified. | |||||||||||||||||||||
| Description and findings re EC7 | BRSA board is responsible for defining the strategic plan for the agency. The plan sets three years goals and objectives and discusses the availability of human and financial resources. Training needs to bridge gaps are assessed annually during the development of the BRSA Annual Training Plan. The process collects training needs from the different departments and proposes events to address them. The plan is discussed with the Human Resources Committee and the Chairman. When additional human resources are considered necessary, head of departments make a request to the Human Resources Committee. After an evaluation, the final decision for hiring new personnel is made by the chairmanship. | |||||||||||||||||||||
| EC8 | In determining supervisory programs and allocating resources, supervisors take into account the risk profile and systemic importance of individual banks and banking groups, and the different mitigation approaches available. | |||||||||||||||||||||
| Description and findings re EC8 | The BRSA determines its supervisory plan with a dynamic risk focus approach. Resources are allocated mainly based on the sector share of bank’s total risk (Credit, Market and Operational) and the bank’s rating determined by the supervisory team. A larger amount of resources are allocate to more risky and systemic important banks. See detailed discussion in CP8. The supervisory plan is continuously revised, which may change the allocation of resources during the year. These are discussed constantly between the frontline analyst teams and the BRSA’s senior management. | |||||||||||||||||||||
| EC9 | Laws provide protection to the supervisor and its staff against lawsuits for actions taken and/or omissions made while discharging their duties in good faith. The supervisor and its staff are adequately protected against the costs of defending their actions and/or omissions made while discharging their duties in good faith. | |||||||||||||||||||||
| Description and findings re EC9 | The BL provides legal protection for the supervisors. Article 104 estates that lawsuits against the Chairman, Board members and staff for actions taken in good faith in the exercise of their responsibilities are subject to the permission of relevant Minister for the Chairman and Board members and the permission of the Chairman for the Agency staff. The law also establishes that for the initiation of any investigation of offenses alleged to have been committed by the chairman, Board members and Agency personnel in connection with their duties there must be a clear and solid evidence indicating that such members or personnel have acted for acquiring interests for themselves or third persons and for causing damages on the Agency or third persons and have acquired interests for themselves or third persons and caused damages as a result of their acts. The law also establishes a framework to protect staff from the costs of litigation connected to their duties in the BRSA even if they have left office. The legal fees for such lawsuits as well as the attorney’s fees are financed from the budget of the Agency. Finally, the law provides protection against legal action for compensation of damages, payment of receivables and executive proceedings. As long as the action is connected with the duties of the Agency, both during and after the staff terms in office, the legal action should be considered to have been taken against the Agency. There were no civil law cases against officers and managers of the BRSA within the scope of this provision in the last five years. | |||||||||||||||||||||
| Assessment of Principle 2 | Materially Non-compliant | |||||||||||||||||||||
| Comments | The legal protection of the supervisor is broadly adequate. Nonetheless the institutional framework contains shortcomings that should be improved. The BL establishes the BRSA as an independent body but it contains provisions that might undermine independence in practice. There are several channels of interaction between the BRSA and the government that, considered together, may accommodate political influence: i) the appointments of the Chair and Board members are made by the Council of Ministers without any confirmation process by other independent body; ii) before putting into force regulatory procedures the BRSA needs, by law, to consult the related Ministry; iii) the Prime Minister can approve the removal, if the conditions specified in the BL are met, of members of the Board without publishing the reasons; iv) the relevant minister may permit lawsuit against board members; and v) the BL allows the relevant ministry to file a lawsuit for the cancelation of the Boards regulatory decisions (art. 105). These possible channels of political influence over the Agency, particularly considering the large role played by state owned banks in Turkey, might cause conflicts of interests that might undermine financial stability. The authorities should therefore review the legislation to limit the cases that require the Minister’s involvement. In particular, it seems appropriate to establish a third party to perform a stronger role in the checks and balances framework such as, making regulatory consultation procedures more transparent, so that BRSA proposals and Ministry comments are published, introducing a process for appointments for the BRSB to be confirmed by a nonexecutive government body and removing the related minister permission for lawsuits for the cancelation of the BRSB regulatory decisions. There also seems to be room for improving the accountability framework. Despite the periodic briefings from the BRSA to the Council of Ministers, the assessors could not see evidence of a third part aiming to ensure that the powers delegated to the BRSA are exercised appropriately and that its operations are effective and in line with its mandate and objectives. Finally, in relation to resourcing, entry conditions to the BRSA are not attractive for the hiring of mid-career professionals and provide practical constraints in the event of a shortfall in experience levels. | |||||||||||||||||||||
| Principle 3 | Cooperation and collaboration. Laws, regulations or other arrangements provide a framework for cooperation and collaboration with relevant domestic authorities and foreign supervisors. These arrangements reflect the need to protect confidential information.9 | |||||||||||||||||||||
| Essential criteria | ||||||||||||||||||||||
| EC1 | Arrangements, formal or informal, are in place for cooperation, including analysis and sharing of information, and undertaking collaborative work, with all domestic authorities with responsibility for the safety and soundness of banks, other financial institutions and/or the stability of the financial system. There is evidence that these arrangements work in practice, where necessary. | |||||||||||||||||||||
| Description and findings re EC1 | There are several arrangements in place for cooperation between domestic authorities. The FSC composed of the Treasury and the heads of the CBRT, BRSA, CMB, and SDIF under the chairmanship under the chairmanship of the Deputy Prime Minister in charge of the Undersecretariat of the Treasury was created in 2011. The FSC aims to identify and mitigate emerging systemic risks and coordinate macroprudential policy actions. In order to further strengthen and support the FSC’s activities, the authorities established the Systemic Risk Assessment Group (SRAG) in October 2012. The SRAG was established by a protocol signed by the FSC members and its main mandate is to identify potential systemic risk areas, alert the FSC about potential systemic risks and improve coordination between member institutions for timely and consistent responses. The SRAG members are the FSC member institutions’ deputies, with the BRSA acting as the secretariat. The SRAG meets at least four times a year, and the minutes and outcomes of the meetings are reported to the FSC. The Financial Sector Commission (FSEC), consisting of the representatives of BRSA, Ministry of Finance, the Treasury, CBRT, CMB, SDIF, Competition Board, SPO, Istanbul Gold Exchange, securities stock exchanges, Futures and Options Markets and the associations of institutions is responsible for establishing and ensuring confidence, stability and the development of the financial markets. This Commission is meant to ensure exchange of information, cooperation and coordination among institutions and propose joint policies. It meets once every six months and shall brief the Council of Ministers regarding the results of its meetings. The article 98 of the BL, also determines the BRSA, Treasury Undersecretary, State Planning Organization Undersecretary, the SDIF and CBRT to exchange views regarding the implementation of monetary, credit and banking policies. Article 98 also contains provisions allowing the BRSA, SDIF and the CBRT to have access to the jointly-agreed databases of each other. The Coordination Committee (CC) composed by the BRSA and the SDIF aims to ensure cooperation in bank resolution. The committee meets quarterly to exchange views about the banking sector and other common issues. Particularly relevant for the supervision of conglomerates are protocols signed for information sharing between BRSA and other local authorities. These authorities includes the Treasury, CMB, SDIF, CBRT, General Directorate of Criminal Registration and Statistics, MASAK, Republic of Turkey Social Security Institution; TÜRKSAT A.Ş., Central Registration Institution and Turkish Competition Authority. There is evidence that these arrangements have been operating and discussing relevant issues. Bilateral protocols like the one signed by the BRSA and the Treasury seem particular relevant for exchange of information such as summaries of inspection reports between supervisors while committees such as the FSC and FSEC focus on more broad issues. | |||||||||||||||||||||
| EC2 | Arrangements, formal or informal, are in place for cooperation, including analysis and sharing of information, and undertaking collaborative work, with relevant foreign supervisors of banks and banking groups. There is evidence that these arrangements work in practice, where necessary. | |||||||||||||||||||||
| Description and findings re EC2 | The legal basis for formal cooperation and information sharing by the BRSA with other foreign supervisory authorities is found in Article 98 of the BL. The BRSA has signed MoUs with supervisory authorities of 34 countries. According to these agreements supervisors commit themselves to use their best endeavors to cooperate in routine supervisions and to notify and provide each other relevant information in a prompt and timely manner regarding any material supervisory concerns. Discussions on MoUs are underway with authorities of 5 additional countries. Article 98 of the BL authorizes the BRSA to cooperate with foreign supervisory authorities even in the absence of an MoU. In this case, eventual requests from foreign authorities are subject to BRSB’s approval considering the principle of reciprocity. The BRSA conducts on-site inspections in foreign jurisdictions in which Turkish banks and their subsidiaries operate and foreign supervisors conduct inspections in Turkey on the basis of reciprocity. When BRSA supervisors conduct on-site examination of banks in a foreign jurisdiction, findings are always shared with foreign supervisory authorities through official correspondence or meetings. Turkish supervisors also participate in supervisory colleges in foreign jurisdictions upon invitation. The BRSA, as a host supervisor authority, is an observer in some supervisory colleges of the global banks which also operate in Turkey. There is evidence of collaborative work. Refer to CP 13 for additional discussion. | |||||||||||||||||||||
| EC3 | The supervisor may provide confidential information to another domestic authority or foreign supervisor but must take reasonable steps to determine that any confidential information so released will be used only for bank-specific or system-wide supervisory purposes and will be treated as confidential by the receiving party. | |||||||||||||||||||||
| Description and findings re EC3 | The framework for the protection of confidential information is established in the article 73 of the BL that lays down the restrictions not only for domestic authorities but also foreign supervisors. In essence all data obtained by the BRSA by virtue of its supervisory activity are covered by professional secrecy. Nevertheless, the BL establishes several working arrangements that allow the exchange of information with other domestic and foreign authorities as long as the principle of confidentiality is appropriately maintained (see EC1 and EC2 above). The BRSA requires other supervisors to commit themselves to protect the information, including signing memorandums of understanding with specific confidentiality clauses. According to the BL, the agency does not share confidential information if it has any reason to believe that the counterparties will not maintain the confidentiality. The BL also forbids the BRSA to share confidential information with anyone who is not authorized by the BL or may use the information for own benefit | |||||||||||||||||||||
| EC4 | The supervisor receiving confidential information from other supervisors uses the confidential information for bank-specific or system-wide supervisory purposes only. The supervisor does not disclose confidential information received to third parties without the permission of the supervisor providing the information and is able to deny any demand (other than a court order or mandate from a legislative body) for confidential information in its possession. In the event that the supervisor is legally compelled to disclose confidential information it has received from another supervisor, the supervisor promptly notifies the originating supervisor, indicating what information it is compelled to release and the circumstances surrounding the release. Where consent to passing on confidential information is not given, the supervisor uses all reasonable means to resist such a demand or protect the confidentiality of the information. | |||||||||||||||||||||
| Description and findings re EC4 | According to the article 73 of the BL, the BRSB is responsible for keeping the confidentiality of information and documents obtained within or outside the scope of MoUs. Confidential information and documents obtained by the Agency may be used for the purposes of licensing, supervision, monitoring compliance with legislation and for administrative lawsuits filed against the decisions of the Board. The confidential information and documents obtained by the BRSA cannot be disclosed to any person or entity, other than the public prosecutors and criminal courts if and when needed in the course of criminal proceedings and prosecutions. Additionally, protocols on information exchange that the BRSA has signed with other domestic authorities contain provisions establishing the confidentiality clauses of the BL. As explained in EC3, all data obtained by the BRSA by virtue of its supervisory activity are covered by professional secrecy. MoUs with foreign authorities contain clauses stating that the provided information is subject to confidentiality and should be used only for supervisory purposes. These clauses also establish that when the supervisor is legally compelled to disclose confidential information it has received from another supervisor, the supervisor promptly notifies the originating supervisor. | |||||||||||||||||||||
| EC5 | Processes are in place for the supervisor to support resolution authorities (e.g., central banks and finance ministries as appropriate) to undertake recovery and resolution planning and actions. | |||||||||||||||||||||
| Description and findings re EC5 | The Turkish resolution authority for credit institutions, including the branches and subsidiaries of foreign banks established in Turkey, participation banks (“Islamic banks”) and financial holding companies is the SDIF. The role of the BRSA in the resolution process is to initiate the resolution and decide on the transfer of a failed bank to the SDIF either by revoking its operating license or by transferring its management and control as defined in the article 71 of the BL. As described in EC1, the CC created by the BL ensures coordination between the two authorities on bank resolution. Following the notification of the BRSA that a bank is asked to take corrective, rehabilitative, or restrictive measures the SDIF develops a bank-specific Resolution Action Plan. The Resolution Action Plan includes alternative bank-specific resolution plans, a verification process for determining the amount of insured deposits to be covered and plans for the rapid deployment of the personnel for the purpose of safeguarding the information technology (IT) systems and data of the bank. However, there is no framework for ex ante recovery and resolution planning in Turkey. The BRSA and the SDIF have formed a joint working group that is currently in the process of developing policy proposals and necessary amendments to the legislation. | |||||||||||||||||||||
| Assessment of Principle 3 | Compliant | |||||||||||||||||||||
| Comments | Legal provisions as well as operational frameworks for cooperation and collaboration with domestic and foreign authorities are in place. Protections on confidentiality appear appropriate. Regarding the lack of processes for recovery and resolution planning, the assessors do not see their absence as reflecting a lack of collaboration between authorities. See also CP9. | |||||||||||||||||||||
| Principle 4 | Permissible activities. The permissible activities of institutions that are licensed and subject to supervision as banks are clearly defined and the use of the word “bank” in names is controlled. | |||||||||||||||||||||
| Essential criteria | ||||||||||||||||||||||
| EC1 | The term “bank” is clearly defined in laws or regulations. | |||||||||||||||||||||
| Description and findings re EC1 | The term “bank” is defined in the BL Article 3 as deposit banks, participation banks and development and investment banks. Deposit banks are defined as the institutions operating primarily for the purpose of accepting deposit and granting loan in their own names and for their own accounts. Participation banks are those operating primarily for the purposes of collecting fund through special current accounts and participation accounts and granting loan. Finally, development and investment banks are those operating primarily for the purposes of granting loan or to fulfill the duties assigned by their special laws, other than accepting deposit or participation funds. | |||||||||||||||||||||
| EC2 | The permissible activities of institutions that are licensed and subject to supervision as banks are clearly defined either by supervisors, or in laws or regulations. | |||||||||||||||||||||
| Description and findings re EC2 | The BL defines the activities that banks are permitted to perform and prohibited to carry out. According to article 4, banks may perform a broad range of activities including accepting deposits or participation funds, granting loans, either cash or non-cash, carrying out any type of payment and collection transactions, including cash and deposit payment and fund transfer transactions, correspondent bank transactions, or use of check accounts, purchasing transactions of commercial bills, safe-keeping services, issuing payment instruments such as credit cards, carrying out foreign exchange transactions, trading of money market instruments, trading of precious metals and stones, trading and intermediation of forward, future and option contracts, purchase and sale of capital market instruments and repurchasing or re-sale commitments, intermediation for issuance or public offering of capital market instruments, transactions for trading previously issued capital market instruments for intermediation purposes, guarantee transactions like undertaking guarantees and other liabilities in favor of other persons, investment counseling services, portfolio operation and management, primary market dealing for purchase-sales transactions, factoring, financial leasing services, insurance agency and individual private pension fund services. The BL also allows banks to perform “other activities to be determined by the Board”. The BRSA has explained that these activities are mostly on advisory services and operational support, particularly for subsidiaries. Banks’ requests to perform other activities are analyzed according to the supervisory opinion on the specific case and principles settled by the BRSB. | |||||||||||||||||||||
| EC3 | The use of the word “bank” and any derivations such as “banking” in a name, including domain names, is limited to licensed and supervised institutions in all circumstances where the general public might otherwise be misled. | |||||||||||||||||||||
| Description and findings re EC3 | According to the article 150 of the BL legal persons who do not have a license are prohibited to use the business title of a bank in notices, advertisements and public statements. It is also prohibited to use other words and expressions which could create the impression that they were accepting deposits or participation funds or acting as a bank. Penalties for the breach of these rules are imprisonment and judicial fines for real persons and close of the business places where the offense is committed. | |||||||||||||||||||||
| EC4 | The taking of deposits from the public is reserved for institutions that are licensed and subject to supervision as banks.10 | |||||||||||||||||||||
| Description and findings re EC4 | Art. 60 of the BL establishes that only credit institutions, that are supervised by BRSA are permitted to accept deposits or participation funds. Accepting deposits without permission of the BRSA is legally punishable. | |||||||||||||||||||||
| EC5 | The supervisor or licensing authority publishes or otherwise makes available a current list of licensed banks, including branches of foreign banks, operating within its jurisdiction in a way that is easily accessible to the public. | |||||||||||||||||||||
| Description and findings re EC5 | The list of licensed banks and branches is published and updated regularly on the BRSA’s website. According to the Article 10 of the BL, the permissions granted shall be published in the Official Gazette. | |||||||||||||||||||||
| Assessment of Principle 4 | Compliant | |||||||||||||||||||||
| Comments | The BL provides clear definitions of activities that are only permitted to be conducted by registered banks, including taking deposits from the public. | |||||||||||||||||||||
| Principle 5 | Licensing criteria. The licensing authority has the power to set criteria and reject applications for establishments that do not meet the criteria. At a minimum, the licensing process consists of an assessment of the ownership structure and governance (including the fitness and propriety of Board members and senior management)11 of the bank and its wider group, and its strategic and operating plan, internal controls, risk management and projected financial condition-(including capital base). Where the proposed owner or parent organization is a foreign bank, the prior consent of its home supervisor is obtained. | |||||||||||||||||||||
| Essential criteria | ||||||||||||||||||||||
| EC1 | The law identifies the authority responsible for granting and withdrawing a banking license. The licensing authority could be the banking supervisor or another competent authority. If the licensing authority and the supervisor are not the same, the supervisor has the right to have its views on each application considered, and its concerns addressed. In addition, the licensing authority provides the supervisor with any information that may be material to the supervision of the licensed bank. The supervisor imposes prudential conditions or limitations on the newly licensed bank, where appropriate. | |||||||||||||||||||||
| Description and findings re EC1 | The BL identifies the BRSA as both the licensing and supervisory authority in Turkey. According to article 6 of the BL, the establishment of a bank in Turkey or the opening up of the first branch in Turkey by a bank established abroad needs to be approved by the BRSB. The licensing of banks in Turkey is a two-step process that includes on-site supervisors and several prudential conditions that needs to be fulfilled by banks. The whole process is conducted by the BRSA. See a description in EC2. During the last five years four banks were granted a license to operate in Turkey. | |||||||||||||||||||||
| EC2 | Laws or regulations give the licensing authority the power to set criteria for licensing banks. If the criteria are not fulfilled or if the information provided is inadequate, the licensing authority has the power to reject an application. If the licensing authority or-supervisor determines that the license was based on false information, the license can be revoked. | |||||||||||||||||||||
| Description and findings re EC2 | Article 7 of the BL establishes a number of conditions that needs to be fulfilled for the establishment of banks in Turkey including that:
In addition to the establishment permission, banks need to request the BRSA permission for operation. The banks that have an establishment permission are required to meet additional criteria including:
The establishment permission of a bank can be revoked by a Board decision in case of one or more of the following conditions (BL, art. 11):
During the last five years one licensed was surrender. None have been revoked. | |||||||||||||||||||||
| EC3 | The criteria for issuing licenses are consistent with those applied in ongoing supervision. | |||||||||||||||||||||
| Description and findings re EC3 | As described in EC 2, the BL provides criteria for authorization and registration that are consistent with those applied for ongoing supervision. | |||||||||||||||||||||
| EC4 | The licensing authority determines that the proposed legal, managerial, operational and ownership structures of the bank and its wider group will not hinder effective supervision on both a solo and a consolidated basis.12 The licensing authority also determines, where appropriate, that these structures will not hinder effective implementation of corrective measures in the future. | |||||||||||||||||||||
| Description and findings re EC4 | Among the criteria imposed by the BL for the establishment of banks it is set out that the ownership structure required does not hamper effective supervision on both a solo and a consolidated level. There are also criteria for clear ownership structures that do not hinder the implementation of corrective measures (see EC2 above for details). | |||||||||||||||||||||
| EC5 | The licensing authority identifies and determines the suitability of the bank’s major shareholders, including the ultimate beneficial owners, and others that may exert significant influence. It also assesses the transparency of the ownership structure, the sources of initial capital and the ability of shareholders to provide additional financial support, where needed. | |||||||||||||||||||||
| Description and findings re EC5 | The BL (article 8) establishes criteria for bank’s founders and natural person shareholder of the legal person founder with qualified shares of banks. These criteria include:
In order to assess the above mention criteria, the BRSA (RTSPIO Art. 4) demands a series of documents such as tables showing the shareholding structure of legal entity founders until their natural partners, lists showing shareholder eventual privileged shares, legal documents stating that qualified shareholders have not been declared bankruptcy, criminal records of qualified shareholders, reports on the financial status of qualified shareholders and commitments to declare the source of capital. The enforcement department of the BRSA analyses all the documents following internal manuals that list topics that should be considered, including when assessing financial strength of the shareholders. In terms of initial capital, according to Article 7of RTSPIO, the Agency examines whether the capital of the bank applying for operating permission has been paid in cash in a manner free of any fictitious transactions and whether it is in an appropriate level. The initial capital of the bank that is transferred to the bank accounts is checked by on-site supervisors that also assess whether the amount of capital is sufficient to fulfill the planned activities. | |||||||||||||||||||||
| EC6 | A minimum initial capital amount is stipulated for all banks. | |||||||||||||||||||||
| Description and findings re EC6 | BRSA has stipulated a minimum capital amount of 300 million USD for all banks (see EC2 above). | |||||||||||||||||||||
| EC7 | The licensing authority, at authorization, evaluates the bank’s proposed Board members and senior management as to expertise and integrity (fit and proper test), and any potential for conflicts of interest. The fit and proper criteria include: (i) skills and experience in relevant financial operations commensurate with the intended activities of the bank; and (ii) no record of criminal activities or adverse regulatory judgments that make a person unfit to uphold important positions in a bank.13 The licensing authority determines whether the bank’s Board has collective sound knowledge of the material activities the bank intends to pursue, and the associated risks. | |||||||||||||||||||||
| Description and findings re EC7 | As described in EC2 the conditions for the establishment of banks in Turkey includes fit and proper criteria for board members. The BL establishes that the majority of the board of directors should meet the qualifications for general manager that includes: not have been declared bankrupt, have not been sentenced to heavy imprisonment or convicted of serious crimes, have at least undergraduate degrees in suitable disciplines and have at least ten years of professional experience in the field of banking or business administration. The Deputy general managers must have at least seven years of professional experience and at least two thirds of them must have at least undergraduate degree in suitable disciplines. Even if employed with different position titles, other executives whose authority and duties are comparable to a deputy general manager or who occupy higher executive positions are subject to the provisions pertaining to deputy general managers. The suitability criterion is evaluated through documents attesting the educational and professional background. The documentation that should be provided to the BRSA is specified in regulation (RSMOD). Apart from educational and professional background, the BRSA also checks if there is no record of criminal activities or adverse regulatory judgments that make a person unfit to uphold managerial positions in a bank. The BRSA does not impose requirements and does not assess if the board of the bank has a collective sound knowledge of the material activities the bank intends to pursue. | |||||||||||||||||||||
| EC8 | The licensing authority reviews the proposed strategic and operating plans of the bank. This includes determining that an appropriate system of corporate governance, risk management and internal controls, including those related to the detection and prevention of criminal activities, as well as the oversight of proposed outsourced functions, will be in place. The operational structure is required to reflect the scope and degree of sophistication of the proposed activities of the bank.14 | |||||||||||||||||||||
| Description and findings re EC8 | As noted in EC2, the criteria for the establishment of banks in Turkey include the harmony of the envisaged activities with planned financial, managerial and organizational structure. The BL also demands the applicant bank to submit to the BRSA the work plans for the envisioned fields of activity, the projections regarding the financial structure of the institution including capital adequacy, the budgetary plan for the first three years and an activity program including internal control, risk management and internal audit system. The RTSPIO demands applicants to send “an operational program, which analyzes benefits expected from establishment of the bank, indicates operations to be carried out and operational plans containing methods of achieving internal supervision, internal control and risk management and incorporates the financial structure of the organization in a manner also containing the capital adequacy of the relevant projections, thereof.” The projections and operational program of the proposed bank is assessed and reviewed with comparison to existing banks in Turkish banking sector that engages in similar activities and have a similar structure. Internal manuals guide the process listing issues that should be considered by supervisors. Compliance with corporate governance regulations, including risk management and internal control systems and IT systems are assessed in on-site supervision before the operating permission is granted. | |||||||||||||||||||||
| EC9 | The licensing authority reviews pro forma financial statements and projections of the proposed bank. This includes an assessment of the adequacy of the financial strength to support the proposed strategic plan as well as financial information on the principal shareholders of the bank. | |||||||||||||||||||||
| Description and findings re EC9 | The BL demands the founders of banks to have the necessary financial strength and reputation. These criteria and financial projections of the proposed bank are assessed by the BRSA during the licensing process (please also refer to EC 2 for details). | |||||||||||||||||||||
| EC10 | In the case of foreign banks establishing a branch or subsidiary, before issuing a license, the host supervisor establishes that no objection (or a statement of no objection) from the home supervisor has been received. For cross-border banking operations in its country, the host supervisor determines whether the home supervisor practices global consolidated supervision. | |||||||||||||||||||||
| Description and findings re EC10 | The criteria for the establishment of foreign banks in Turkey includes that the bank primary activities must not have been prohibited in the country where they are headquartered and that the home supervisor do not have negative views regarding its operation in Turkey. In order to assess these requirements, the BRSA requires a “no objection letter” from the home supervisor (RTSPIO). Nevertheless, there is no determination that the home supervisor practices global consolidated supervision. | |||||||||||||||||||||
| EC11 | The licensing authority or supervisor has policies and processes to monitor the progress of new entrants in meeting their business and strategic goals, and to determine that supervisory requirements outlined in the license approval are being met. | |||||||||||||||||||||
| Description and findings re EC11 | During the license approval process, banks are instructed on issues that need improvements and eventual recommendations to correct deficiencies are shared with on-site supervisors who are responsible for following them up. As explained in EC2, licensing is a two-step process. The period between the establishment permission and the operation permission is a monitoring phase with a special focus on governance and operational requirements. Once the bank starts operating, supervision procedures follow the ones applicable to all banks. These procedures include assessing the actual performance of banks in relation to their business plans. | |||||||||||||||||||||
| Assessment of Principle 5 | Largely Compliant | |||||||||||||||||||||
| Comments | Provisions in the laws and regulations related to licensing and the process followed by the BRSA provide a comprehensive framework to assess the adequacy of new registrations for banks, including foreign bank branches. The BRSA seems to have a broadly sound process to assess applications in practice. However, in order to maintain a licensing process fully compliant with the principle, the BRSA needs to additionally: i) impose requirements and assess if the bank’s board has a collectively sound knowledge of the material activities the bank intends to pursue; and ii) for cross-border banking operations, determine whether the home supervisor practices global consolidated supervision. | |||||||||||||||||||||
| Principle 6 | Transfer of significant ownership. The supervisor15 has the power to review, reject and impose prudential conditions on any proposals to transfer significant ownership or controlling interests held directly or indirectly in existing banks to other parties. | |||||||||||||||||||||
| Essential criteria | ||||||||||||||||||||||
| EC1 | Laws or regulations contain clear definitions of “significant ownership” and “controlling interest”. | |||||||||||||||||||||
| Description and findings re EC1 | According to the Article 3 of the BL, “control” is defined as “the power to appoint or remove from office the decision-taking majority of members of board of directors through direct or indirect possession of the majority of a legal entity’s capital irrespective of the requirement of owning minimum 51 % of its capital; or by having control over the majority of the voting right as a consequence of holding privileged shares or of agreements with other shareholders although not owning the majority of capital”. The concept of “Significant ownership” is referred in the BL as “qualified shares” and is defined as “the shares that represent, directly or indirectly, 10 % or more of the capital or voting rights of an undertaking or that yield the privilege to appoint members to board of directors even though such rate is below 10 %”. The BL also define “dominant partner” as “natural or legal entities that directly or indirectly, individually or jointly control an undertaking”. | |||||||||||||||||||||
| EC2 | There are requirements to obtain supervisory approval or provide immediate notification of proposed changes that would result in a change in ownership, including beneficial ownership, or the exercise of voting rights over a particular threshold or change in controlling interest. | |||||||||||||||||||||
| Description and findings re EC2 | The BL establish requirements for approval of changes in ownership. Article 18 of the BL requires the permission of the BRSA for:
The documents that are required to be submitted for transfer of ownership are listed in Article 11 of Regulation on Transactions Subject to Permission and Indirect Shareholding (RTSPIO). | |||||||||||||||||||||
| EC3 | The supervisor has the power to reject any proposal for a change in significant ownership, including beneficial ownership, or controlling interest, or prevent the exercise of voting rights in respect of such investments to ensure that any change in significant ownership meets criteria comparable to those used for licensing banks. If the supervisor determines that the change in significant ownership was based on false information, the supervisor has the power to reject, modify or reverse the change in significant ownership. | |||||||||||||||||||||
| Description and findings re EC3 | The BRSA has the power to reject any proposal for a change in significant ownership, (article 18 of the BL), as each material change (according to predefined thresholds) requires its permission (see also EC2). According to the Article 18 of the BL, the shareholders with qualified shares who do not bear the conditions required for founders any more shall not benefit from the shareholder rights other than dividends. In such cases, other shareholder rights shall be exercised by SDIF, upon the notification of BRSA. Such shareholders shall not use their preferential rights until the rate of their direct or indirect shares in the capital fall below 10 %. If BRSA determines that the change in significant ownership was based on false information, according to the article 155 of BL, those persons may be sentenced to imprisonment from one year to three years and a judicial fine which shall not be less than 1,500 days. | |||||||||||||||||||||
| EC4 | The supervisor obtains from banks, through periodic reporting or on-site examinations, the names and holdings of all significant shareholders or those that exert controlling influence, including the identities of beneficial owners of shares being held by nominees, custodians and through vehicles that might be used to disguise ownership. | |||||||||||||||||||||
| Description and findings re EC4 | Banks are required to submit their detailed shareholders structure on a monthly basis by means of a surveillance report. This report covers name and country of the owner, the size of holding, share percentage, control type (qualified, preferred shares, jointly control, non-controlling share etc.) and the way of ownership (directly owned, from public offering). Additionally, in order to evaluate qualified legal entity shareholders’ ownership structure, the BRSA requires one additional surveillance report semiannually. | |||||||||||||||||||||
| EC5 | The supervisor has the power to take appropriate action to modify, reverse or otherwise address a change of control that has taken place without the necessary notification to or approval from the supervisor. | |||||||||||||||||||||
| Description and findings re EC5 | According to the Article 18 of the BL, transferring of shares affected without permission shall not be recorded in the book of shares. Any records made in the book of shares in breach of the foregoing provision shall be null and void. Furthermore, article 18 also establishes that in cases where the shares are transferred without the permission of the Board, the shareholder rights of the legal entity stemming from these shares, other than dividends, shall be exercised by the SDIF. | |||||||||||||||||||||
| EC6 | Laws or regulations or the supervisor require banks to notify the supervisor as soon as they become aware of any material information which may negatively affect the suitability of a major shareholder or a party that has a controlling interest. | |||||||||||||||||||||
| Description and findings re EC6 | According to 11(5) of RTSPIO “The board of directors is under obligation to take actions and measures for determination of whether a prior consent of the [BRSA] Board is taken for participants of bank general assembly meetings within the frame of obligations arising out of Article 18 of the Law, except for third, seventh and eighth paragraphs thereof.” The BRSA explained that in order to fulfill the determination of the RTSPIO mentioned above as well as the determinations of article 18 of the BL, banks notify the BRSA when a shareholder no longer meets the criteria for major shareholders. | |||||||||||||||||||||
| Assessment of principle 6 | Compliant | |||||||||||||||||||||
| Comments | The power given to the supervisor by laws and regulations as well as the current procedures provide broadly sound control and oversight regarding significant ownership of a bank and a controlling company. | |||||||||||||||||||||
| Principle 7 | Major acquisitions. The supervisor has the power to approve or reject (or recommend to the responsible authority the approval or rejection of), and impose prudential conditions on, major acquisitions or investments by a bank, against prescribed criteria, including the establishment of cross-border operations, and to determine that corporate affiliations or structures do not expose the bank to undue risks or hinder effective supervision. | |||||||||||||||||||||
| Essential criteria | ||||||||||||||||||||||
| EC1 | Laws or regulations clearly define:
| |||||||||||||||||||||
| Description and findings re EC1 | Turkish laws and regulations require that all banks investments, with the exception of banks trading operations, need supervisory approval. Cross border investments of banks require the BRSA approval according to the article 14 of the BL and article 9 of RTSPIO. In order to be allowed to make a cross border investment, banks’ practices should be in line with corporate governance and safeguarding provisions of the BL. Furthermore, there should be no obstacles in gathering information and executing supervision on the cross border company. Previous permission for participating or establishing a domestic partnership is required by the article 8 of the RTSPIO. Additionally, article 57 of the BL prohibits banks to invest in entities whose main field of activity is property trading, except for mortgage financing institutions and real estate investment trusts. The mentioned provisions of RTSPIO are not applied on investments made on shares for trading purposes, or on acquisition of shares solely for collection and recovery of receivables, or on participation in capital increases of partnerships. Finally, article 56 of the BL limits the acquisition of shares by banks at undertakings other than credit institutions and financial institutions at an amount of 15% of its own funds, and the total amount of its shares in these undertakings shall not be more than 60 % of its own funds. Any investment in excess of the above limits is deducted from bank’s equity for capital adequacy purposes. | |||||||||||||||||||||
| EC2 | Laws or regulations provide criteria by which to judge individual proposals | |||||||||||||||||||||
| Description and findings re EC2 | The regulatory framework determines that the investment of banks domestically and abroad needs to comply with corporate governance and protective provisions. According to article 14 of the BL, banks established in Turkey may open branches or representative offices abroad, including off-shore banking regions, set up undertakings or participate in existing undertakings on the condition that they comply with the corporate governance and protective provisions, such as capital and liquidity adequacy or large exposures limits (article 43, 44, 45, 46, 54, 57 of BL). According to the article 8 of RTSPIO, banks established in Turkey may set up undertakings or participate in existing undertakings at home as long as they comply with the corporate governance and protective provisions, such as capital and liquidity adequacy or large exposures limits (article 43, 44, 45, 46, 54, 57 of BL) and the principles established by BRSB. The permission to allow the investments is decided by the BRSA board. Article 9 of RTSPIO requires banks planning to invest in or establish foreign entities to submit to the BRSA a detailed feasibility study indicating sums of funds necessary, an analysis of costs and benefits concerning the proposed activity, estimated balance sheets, cash flows and profit/loss schedules which set forth targets for three years from foundation. The assessors could see examples showing that in practice the application of articles 8 and 9 of RTSPIO require the applicant banks to be compliant with management, internal systems, financial reporting and prudential requirements such as capital adequacy, liquidity, asset quality, provisioning and large exposures limits as stipulated in the BL and regulations. The BRSA also verifies that there should be no obstacles in gathering information and conducting supervision of the cross border company. If needed, the BRSA may require an MoU with the host supervisory authority. | |||||||||||||||||||||
| EC3 | Consistent with the licensing requirements, among the objective criteria that the supervisor uses, is that any new acquisitions and investments do not expose the bank to undue risks or hinder effective supervision. The supervisor also determines, where appropriate, that these new acquisitions and investments will not hinder effective implementation of corrective measures in the future.16 The supervisor can prohibit banks from making major acquisitions/investments (including the establishment of cross-border banking operations) in countries with laws or regulations prohibiting information flows deemed necessary for adequate consolidated supervision. The supervisor takes into consideration the effectiveness of supervision in the host country and its own ability to exercise supervision on a consolidated basis. | |||||||||||||||||||||
| Description and findings re EC3 | The BRSA analyses, as part of the approval process, the risks posed by new acquisitions and investments to the banking group. The analysis is performed mainly by the evaluation of a detailed feasibility study submitted by banks. Compliance with prudential measures such as capital and liquidity adequacy is also verified. Please also refer to EC2. Powers attributed to the BRSA by the BL allows effective supervision of domestic undertakings (see CP 1 and 12 for discussion). Consistent with the licensing criteria, according to Article 9 of RTSPIO, there should be no obstacles in gathering information and conducting supervision of the cross border company and, where necessary, the BRSA may require an MoU with the host supervisory authority. Nevertheless, there is no explicit consideration about the effectiveness of supervision in the host countries. | |||||||||||||||||||||
| EC4 | The supervisor determines that the bank has, from the outset, adequate financial, managerial and organizational resources to handle the acquisition/investment. | |||||||||||||||||||||
| Description and findings re EC4 | Based on the laws and regulations explained in EC 2, banks are required to submit a detailed feasibility study indicating necessary resources, costs and benefits analysis of the proposed activity, estimated balance sheets and cash flows and profit/loss estimates for the following three years from foundation. The BRSA evaluates the submitted study during the process of granting permission. The regulation (RTSPIO) is explicit about the required study only for cross border investments, but the assessors also observed examples where domestic investments were analyzed in similar terms. Additionally, Article 8/7 of RTSPIO requires banks to submit a report explaining the reasoning behind the proposed domestic investment. | |||||||||||||||||||||
| EC5 | The supervisor is aware of the risks that non-banking activities can pose to a banking group and has the means to take action to mitigate those risks. The supervisor considers the ability of the bank to manage these risks prior to permitting investment in non-banking activities. | |||||||||||||||||||||
| Description and findings re EC5 | The assessment of the risks that non-banking activities can pose to a banking group is mostly assessed in the CAMELS rating process (see CP8). The process involves the assessment of many topics, including the risk that subsidiaries and other entities of the group may represent to the bank. The Internal Capital Adequacy Assessment Process of Banks (ICAAP) and its revision by the supervisor also address risks from non-banking activities. The opinion formulated on these assessments is reflected in the decision to permit banks to invest in non-banking activities. Finally, the BL sets limit for investing in non-financial activities. According to article 56 of BL, a bank shall not acquire shares in entities other than credit institutions and financial institutions in excess of 15 % of its own funds, and the total amount of such investments shall not be more than 60 %of its own funds. Any investment in excess of the above limits reduce bank’s equity for capital adequacy purposes. | |||||||||||||||||||||
| AC1 | The supervisor reviews major acquisitions or investments by other entities in the banking group to determine that these do not expose the bank to any undue risks or hinder effective supervision. The supervisor also determines, where appropriate, that these new acquisitions and investments will not hinder effective implementation of corrective measures in the future.17 Where necessary, the supervisor is able to effectively address the risks to the bank arising from such acquisitions or investments. | |||||||||||||||||||||
| Description and findings re AC1 | ||||||||||||||||||||||
| Assessment of Principle 7 | Compliant | |||||||||||||||||||||
| Comments | The regulatory framework subjects major acquisitions and investments by banks and controlling companies to prior approval by the BRSA. The BRSA also has well established supervisory practices to limit and monitor risks arising from such activities. Going forward, supervisors should consider more extensively and formally the effectiveness of supervision in host countries. | |||||||||||||||||||||
| Principle 8 | Supervisory approach. An effective system of banking supervision requires the supervisor to develop and maintain a forward-looking assessment of the risk profile of individual banks and banking groups, proportionate to their systemic importance; identify, assess and address risks emanating from banks and the banking system as a whole; have a framework in place for early intervention; and have plans in place, in partnership with other relevant authorities, to take action to resolve banks in an orderly manner if they become non-viable. | |||||||||||||||||||||
| Essential criteria | ||||||||||||||||||||||
| EC1 | The supervisor uses a methodology for determining and assessing on an ongoing basis the nature, impact and scope of the risks:
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| Description and findings re EC1 | The supervisory approach of the BRSA is defined in the RAA as a dynamic risk-focused (RFS) one that aims to ensure efficiency, continue adequacy of supervision and efficient allocation of supervisory resources. The approach proposes to shape supervision form, scope, time, content and intensity based on the risk profile and adequacy of internal controls and risk management systems of each institution. The BRSA’s methodology for ongoing supervision of banks, established in the Supervisory Manual on Banking Supervision Process (SMBSP) is organized in supervisory cycles that last one year. Main Players Three different departments play major roles in the supervisory cycle: - The audit departments are responsible for on-site inspections. That includes special inspections, complementary inspections and the Camels rating system (see below). - The off-site department analyzes various indicators related to bank’s financial performance in different periods and prepares periodical reports on issues of concern. The analysis made by the off-site team aims to provide feedback and early warning mechanism for emerging risks for on-site inspections. - The enforcement department is responsible for the formal communication between banks and the BRSA in relation to corrective measures. Findings of the audit and off-site department are analyzed by the enforcement department that proposes supervisory actions to the BRSB or another competent authority within the BRSA. Planning The first phase of the cycle is the strategic planning. Based on previous accumulated knowledge this phase sets a high level plan for on-site inspections, listing the banks that will be assessed and broadly allocating the personal for each activity. The plan is elaborated by the heads of the audit departments and is approved by the chairman. One of the main inputs of the planning phase is the risk profile of the bank, represented by its supervisory rating and its systemic importance. More specifically, the SMBSP determines that the minimum frequency of inspections depends on: - The sector share (SS) of bank’s total risk weighted exposure amount, - Bank’s final rating which is assigned by the supervision team at the end of the supervision process. (10 is the worst, 1 is the best rating) Banks are mapped into three different categories, “red”, “yellow” and “green”, based on the above indicators and the following matrix:
Banks in the “red” category are examined on-site annually, banks in the “yellow” category are examined at least once every two years and the banks in “green” category are examined at least once every three years. The BRSA explained that even though the rule would allow some of the largest banks to be assessed every other year, in practice they are examined annually due to its systemic importance. Identification of Risk Areas (IRA) Banks selected to be assessed on-site are subject to the IRA phase of the supervisory cycle. The IRA aims to provide a snapshot of the risks of different areas of the bank. This phase is meant to be a short initial assessment based mainly on previous available information, including the latest risk matrix and profile, CAMELS rating, internal capital adequacy assessment process (ICAAP) report, special and complementary inspections and off-site reports. The IRA produces an initial opinion about the riskiness of different areas of the bank and a supervision plan identifying the specific areas that are going to be subject to special inspections. Camels rating assessment is performed in all other areas. Special Inspections (SI) Special Inspections (SI), as described in the Supervisory Manual on Special Inspections Report, are detailed on-site inspections meant to assess risks and quality of management in a particular area under inspection. SI are meant to reveal problems that have the potential to affect the financial soundness of the bank and identify measures that should be required from banks to resolve eventual problems and mitigate risks. The number of Special Inspections conducted in 2014 and 2015 were 61 and 44 respectively. Among these 105 SI, there were 70 SI conducted on loan portfolios in 27 different banks. SIs are deep evaluations performed in three levels. The first level checks the adequacy of internal evaluations made by banks aiming to determine whether or not the bank manages well its activities and risks arising from those activities. The second level contrasts banks practices with BRSA best practice guidelines and finally, the last level examine specific transactions and operations through sampling methodology looking for potential issues that might affect the financial soundness of the bank. SIs may have different themes, for instance, specific credit portfolios, business model and profitability, information systems, liquidity management and derivatives among others. CAMELS rating and risk profile The CAMELS rating phase of the supervisory cycle is conducted by analyses of the financial soundness of the bank and the assessment of the efficiency of the bank’s general risk profile, risk management and internal control and internal audit systems. The analyses is guided by a series of almost five hundred questions, contained in the Annex of the General Assessment Report (GAR), that supervisors are required to answer using as inputs the IRA evaluation, SI and ICAAP reports, banks data and discussion with bank managers. Relevant information is scanned and included in system in order to substantiate the response to the questions. The results of this phase are a financial structure and rating report, risk matrix, risk profile and their view of the ICAAP report submitted by banks. Complementary analyses. Once the SI and rating processes are completed, the BRSA executes a series of additional on-site inspections that usually have a stronger compliance nature. These inspections cover issues such as legal concerns, policies and processes on anti-money laundering and combating the financing of terrorism (AML/CFT) and follow up on supervisory findings and consumer complaints. Also see CP 29 to discussion on AML/CFT inspections. Additionally, supervision teams may also perform thematic reviews considering developments and trends in the banking sector or significant specific changes to the operation of the bank. Banks not been assessed on-site Banks within “yellow” and “green” categories, that are not been assessed on-site in one particular year (e.g., have not been submitted to IRA, SI, rating and complementary inspections) should be assessed by the supervision teams of the audit department at least every six month (green category) or quarterly (yellow) through off-site reports including “Monthly Report of Follow-Up of Compliance with Legal Limits”, “Monthly Report of Ratios Follow-Up” and “Monthly Report”. The SMBSP manual requests that the evaluations shall not be limited to the mentioned surveillance reports but also take into account the effects of current macroeconomic developments on the financial soundness of the bank, as well as the changes in shareholder structure and similar issues. Off-site supervision During the whole process, on-site supervision teams from the audit department have access to off-site reports regarding banks and other financial companies on a solo and consolidated basis. These reports include stress test and various prudential ratios of the bank and its peers. Additionally, during on-site inspections, supervisors have easy access to comprehensive databases with information of banks and its groups. See CP 10 for additional information. Furthermore, within the scope of the off-site supervision function, the BRSA monitors individual banks and the banking sector as a whole, evaluates potential risks and informs on-site teams and upper management about present or emerging vulnerabilities. Bank surveillance reports, periodic and non-periodic thematic reports, stress tests and banking sector presentations are the main outputs of off-site supervision (also refer to CP 9). Practice The assessors reviewed examples of inputs, working papers and outputs of the different phases of the supervisory cycle. The review suggested that the practical implementation of the supervisory manuals face challenges that might hinder the quality of the process and its products. One of the shortcomings is an excessive compliance nature of the inspections. Although the declared goal of all the different inspections is to evaluate the risks faced by the bank, in practice the inspections appear to focus extensively on establishing compliance with the different regulations. The inspections seem to fall short of developing a clear view on the risks faced and posed by the bank and particularly important on the potential need for broader and more forceful supervisory action. To support this process, supervisors need to establish and highlight the implications of the findings of specific inspections for the broader risk assessment of the bank, which frequently does not seem to be the case. Another point that needs to be considered is the strength and weaknesses of the CAMELS rating process. The process is comprehensive and requires supervisors to collect a large set of information to be able to provide answers on almost five hundred different criteria. Nevertheless, it is important to recognize that, by its own nature, the analyses executed by the supervisor during the rating process cannot be as deep and comprehensive as the ones performed, for example, during special inspections. The relatively limited nature of the ratings is expected and is not necessarily a problem if supervisors frequently take more detailed approaches to inspect the bank. It is not enough to inspect a number of issues only during the ratings process. BRSA should not take excessive comfort from the fact that some issues are analyzed during this phase. From time to time, the scope of special inspections needs to encompass issues that currently seem to be addressed only during the ratings phase. Regarding banks that have not been selected to be inspected in one particular year, it was not possible to verify what kind of supervisory attention is given to them due to the fact that the supervisors’ analyses of off-site reports, do not typically deliver a formal assessment. Nevertheless, the possibility embedded in the current methodology of leaving some banks without a structured supervisory assessment for up to three years seems inadequate. Finally, the BRSA has not started to assess the resolvability of banks. | |||||||||||||||||||||
| EC2 | The supervisor has processes to understand the risk profile of banks and banking groups and employs a well-defined methodology to establish a forward-looking view of the profile. The nature of the supervisory work on each bank is based on the results of this analysis. | |||||||||||||||||||||
| Description and findings re EC2 | As described in EC 1 and in the Supervisory Manual on Banking Supervision Process (SMBSP), the BRSA has a process to understand the risk profile of the banks. Different phases of the supervisory cycle aim to deepen the understanding of the banks risks. From the initial IRA until the Camels rating, the results of the previous phases are used to guide the work that is done subsequently. The criteria for risk assessment are well established in the Supervisory Manual on Risk Assessment Criteria (SMRAC). The final products of the supervisory cycle, particularly the risk matrix and risk profile aims to show the risk types and levels which the banks are exposed to. The most important forward looking element of the methodology is the ICAAP assessment that involves capital projections, by banks, for the following three years under different economic scenario. Nevertheless, the revision of supervisors’ working papers and discussion with banks suggested that the process still is in a learning phase. The quality of banks reports and the scrutiny of the reports by supervisors need to develop further before the results can be more extensively used. Furthermore, as part of the off-site supervision efforts, the BRSA performs top-down stress testing analyses (please refer to CP9). The methodology could provide an important forward looking tool to deepen the assessment of the risk profile of banks and drive supervisory action but the assessors saw little evidence of its use currently during the banks’ assessment process. Finally, the CAMELS rating system and the matrix used to summarize the risk profile of the banks does not have an explicit forward looking component that provides an indication of future trends in the soundness of the bank. | |||||||||||||||||||||
| EC3 | The supervisor assesses banks’ and banking groups’ compliance with prudential regulations and other legal requirements. | |||||||||||||||||||||
| Description and findings re EC3 | The BL provides an appropriate framework for the BRSA to conduct compliance inspection in banks as part of its regular inspection activities. These inspections include compliance with the BL, sub-regulations issued by the BRSA and other regulations applied to banks, including anti-money laundering. The BRSA utilizes a number of tools to assess compliance of banks and banking groups with prudential and other requirements. As described in EC1, on-site supervisors conduct several compliance inspections during the complementary analysis phase of the supervisory cycle. Additionally, the rating process also involves the analysis of banks compliance with regulation and prescribed best practices. Finally, the off-site department generates monthly reports to confirm banks’ consolidated and non-consolidated compliance with prudential regulations and other legal requirements. There is an off-site reporting template supporting a legal requirements check list. When a breach is detected, the BRSA takes necessary actions including demand the correction and applying penalties. | |||||||||||||||||||||
| EC4 | The supervisor takes the macroeconomic environment into account in its risk assessment of banks and banking groups. The supervisor also takes into account cross-sectoral developments, for example in non-bank financial institutions, through frequent contact with their regulators. | |||||||||||||||||||||
| Description and findings re EC4 | The BRSA develops macroeconomic analysis that includes local and global conditions that might affect the banking system. These analyses are inputs for bank inspections. According to Supervisory Manual for Identifying Risky Areas and Supervision Planning (SMIRASP), inspection teams are expected to examine the diversity and scope of the bank’s activities and products, risk appetite, place in the sector, growth plan and strategies. They are also expected to understand the corporate culture of the bank and to have an opinion about the bank’s financial soundness and risk profile on a consolidated basis. While forming this opinion, the latest developments affecting all the institutions belonging to the group and its major shareholders, including non-bank activities, should be considered in conjunction with the latest trends and general macroeconomic conditions. As part of the off-site monitoring function, the BRSA develops reports regarding the banks’ derivative transactions, CDS spreads, equity prices, that are used by supervision staff and senior management. Depending on market developments and risk factors, specific analysis and reports are also prepared. The macroeconomic environment is also considered in stress testing studies. Top down macro stress testing studies employ a baseline and an adverse scenario and try to estimate how banks and the industry will be affected within a two years’ time frame. Macro variables such as GDP growth, FX rates, interest rates and unemployment rates in alternative scenarios are modeled and related with banks financial structure in terms of credit risk, interest rate risk, exchange rate risk and contagion risk. These analyses help to take account of the macroeconomic environment in both bank supervision and systemic risk analysis. Regarding cross-sectoral developments, the rating process includes a section called consolidated supervision containing questions that aims to evaluate relationship among the bank and other financial and non-financial entities of the group. Additionally, some specific reports are prepared by off-site supervision in order to assess the banking sector as a whole. As mentioned in EC1, the rating process analyses are limited by its own nature. BRSA also participates in a number of committees and working arrangements that allow the collaboration among different financial market supervisors (see CP 1 and 3 for details). In particular, BRSA, Treasury and CMB meet annually to share their findings and concerns and coordinate the supervision efforts toward insurance firms, investment firms, pension fund firms and others which are affiliated with banks. | |||||||||||||||||||||
| EC5 | The supervisor, in conjunction with other relevant authorities, identifies monitors and assesses the build-up of risks, trends and concentrations within and across the banking system as a whole. This includes, among other things, banks’ problem assets and sources of liquidity (such as domestic and foreign currency funding conditions, and costs). The supervisor incorporates this analysis into its assessment of banks and banking groups and addresses proactively any serious threat to the stability of the banking system. The supervisor communicates any significant trends or emerging risks identified to banks and to other relevant authorities with responsibilities for financial system stability. | |||||||||||||||||||||
| Description and findings re EC5 | The BRSA requires banks to submit information on a number of issues and converts them in a meaningful database for analyzing the financial system. Concentrations and trends are monitored through reports generated from this database. The BRSA off-site supervision function monitors and assesses asset quality, profitability, capital adequacy and liquidity of the individual banks and banking system as a whole by means of periodic reports such as: Bank Surveillance Reports, Weekly Banking Sector Report, Potential Non-Performing Loans Report, Monthly Key Indicators Report, Banking Sector Outlook, Stress Test Report, Country Risk Report, Credit Bureau Individual Credit Rating Results Report, etc. In addition to periodic reports, ad-hoc analysis about emerging risks and tendencies facing the banking sector are also prepared. It was mention, as an example, that because of the size of the open positions of the corporations, FX lending was a potential emerging risk factor for the sector. In the second half of 2015 a survey was conducted on FX loans which covered 2,527 biggest firms (71 % of total FX loans) and gathered information about FX assets, liabilities, income generation capacity and derivatives for hedging FX risks. BRSA findings are discussed in a number of committees with other authorities. Particularly relevant are the FSC and FSEC. See CP 1 and 3 for additional information. | |||||||||||||||||||||
| EC6 | Drawing on information provided by the bank and other national supervisors, the supervisor, in conjunction with the resolution authority, assesses the bank’s resolvability where appropriate, having regard to the bank’s risk profile and systemic importance. When bank-specific barriers to orderly resolution are identified, the supervisor requires, where necessary, banks to adopt appropriate measures, such as changes to business strategies, managerial, operational and ownership structures, and internal procedures. Any such measures take into account their effect on the soundness and stability of ongoing business. | |||||||||||||||||||||
| Description and findings re EC6 | According to the BL, the two authorities with roles in bank resolution are the BRSA and the SDIF. They regularly meet to exchange information and discuss measures and policies about banks (please refer to CP3). Additionally, BRSA and SDIF are the members of FSC and FSEC which are formed to increase the coordination, cooperation and information sharing among these institutions. Under the current legislative framework, resolution options and tools are evaluated when the bank is asked to take corrective actions. These options are analyzed taking into account high level considerations such as safeguarding confidence and financial stability, prevailing market conditions and cost-effectiveness of resolution. The BRSA and the SDIF have established a joint working group to analyze the eventual need to change the current resolution regime and align it with FSB’s Key Attributes of Effective Resolution Regimes. As part of this process, the two institutions have agreed to include resolvability assessment into the legislation. The joint working group is still formulating policy proposals and necessary legislative amendments on these issues. For the time being, banks are not required to develop recovery plans and supervisors have not started to assess banks’ resolvability. | |||||||||||||||||||||
| EC7 | The supervisor has a clear framework or process for handling banks in times of stress, such that any decisions to require or undertake recovery or resolution actions are made in a timely manner. | |||||||||||||||||||||
| Description and findings re EC7 | The BRSA has the authority to take an appropriate range of remedial actions which are stated in the Articles of 68, 69 and 70 of BL. The range of measures is broad and allows appropriate escalation according to the situation (see CP 1 for detailed description). Supervisory procedures are also intensified when banks are under stress. The frequency of inspections increase with the deterioration of the rating of the bank and the number of topics covered in the inspections may also increase due to the number of meaningful weaknesses identified (see details in EC1). When the BRSA decides to initiate the resolution, the process involves either the revocation of the bank’s operating permission (Article 106 BL) or the transfer of the management and control of the bank to the SDIF (Article 107 BL). The decision about the process is based on general considerations, such as the structure of the balance sheet, the amount of deposits and potential wider impact of the different options. After the bank is transferred to the SDIF, the SDIF decides which actions to take in line with its mandate and powers specified in the BL. If the bank is resolved under Article 106, the operating license of the failed bank is revoked and the SDIF makes a pay-out to the insured depositors and apply to the courts for a decision as to whether a bankruptcy proceeding should be initiated for the remainder of the failed bank. If the court rejects the application, the SDIF may start liquidation proceedings through a decision of the SDIF Board. In cases where the BRSA transfers management and control of a bank to the SDIF, the SDIF has wide powers under Article 107 of BL, including to suspend the activities of the bank and manage it, transfer assets and liabilities, take over its shares and restructure it, sell or merge it with another bank, and request the BRSA to revoke the operating license of the bank. The SDIF may also provide financial support to a failing bank if it has acquired all or the majority of its shares. One issue that should be considered in the effectiveness of the framework is that the sharing of communication responsibilities between the audit and the enforcement departments seems to generate a fragmented process that increases the risks that the messages conveyed to the bank do not reflect appropriately supervisory concerns. The speed of actions and decisions might also be affected. Please refer to CP9. As explained in EC6, authorities are studying changes in the current resolution framework to harmonize it with the FSB’s Key Attributes of Effective Resolution Regimes. | |||||||||||||||||||||
| EC8 | Where the supervisor becomes aware of bank-like activities being performed fully or partially outside the regulatory perimeter, the supervisor takes appropriate steps to draw the matter to the attention of the responsible authority. Where the supervisor becomes aware of banks restructuring their activities to avoid the regulatory perimeter, the supervisor takes appropriate steps to address this. | |||||||||||||||||||||
| Description and findings re EC8 | Bank-like activities without the authorization of BRSA are legally punishable. BRSA initiates investigations in case of file of complaints or information provided on potentially bank-like activities being performed without required permission. If needed, findings are submitted to the responsible authority for further proper legal actions, including reporting to the prosecutor’s office. The restructuring of a bank that involves establishing a subsidiary or investing in a joint venture requires a prior approval by the BRSA, where the bank needs to provide detailed information regarding structures and activities of the new undertaking. The BRSA explains it would not approve the application if it results in avoidance of the regulatory perimeter. Furthermore, the BRSA receives call reports on the structured of the banking groups and analyze group structure issues during on-site inspections. | |||||||||||||||||||||
| Assessment of Principle 8 | Materially Non-compliant | |||||||||||||||||||||
| Comments | The BRSA has an established and comprehensive methodology to supervise banks. This methodology is documented on a number of manuals and grounded on comprehensive databases and a broadly appropriate regulatory framework. Nevertheless, the practical implementation of the process is subject to shortcomings that needs to be addressed:
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| Principle 9 | Supervisory techniques and tools. The supervisor uses an appropriate range of techniques and tools to implement the supervisory approach and deploys supervisory resources on a proportionate basis, taking into account the risk profile and systemic importance of banks. | |||||||||||||||||||||
| Essential criteria | ||||||||||||||||||||||
| EC1 | The supervisor employs an appropriate mix of on-site18 and off-site19 supervision to evaluate the condition of banks and banking groups, their risk profile, internal control environment and the corrective measures necessary to address supervisory concerns. The specific mix between on-site and off-site supervision may be determined by the particular conditions and circumstances of the country and the bank. The supervisor regularly assesses the quality, effectiveness and integration of its on-site and off-site functions, and amends its approach, as needed. | |||||||||||||||||||||
| Description and findings re EC1 | The principles and procedures for the supervision of the institutions under the scope of the BRSA are determined by RAA. More specifically, article 5 of the RAA defines that the BRSA will conduct risk focus supervision (RFS). The RFS approach aims to shape the scope and intensity of the supervision taking into consideration the risk profile and the existence and adequacy of internal controls and risk management systems of banks. The BRSA’s supervision system is composed of two essential activities, on-site and off-site supervision which aims to complement and support each other. On-site supervision On-site supervision covers issues that might have an impact on the financial safety and soundness of the bank, including a comprehensive risk assessment of the bank to identify its risk profile. On-site supervisors frequently perform: i) comprehensive reviews of the loan portfolio and the adequacy and effectiveness of the internal control systems; ii) evaluation of the compliance of the financial statements and accounts with national and international accounting standards; iii) assessment and analysis of the consolidated group; iv) analysis of the adequacy and reliability of the information systems of the bank; and v) alignment of the operations of the bank with all relevant legislation, among other activities. Bank’s inherent risks are analyzed taking into account its risk management framework as well as its compliance with corporate governance principles. Corrective measures are recommended when problems are identified. See CP8 for detailed discussion on the supervisory cycle and description of on-site main inspections. CP 11 discusses corrective measures. Currently there are approximately, 75 on-site examiners assigned to conduct on-site bank inspections and 17 examiners assigned to non-bank financial institutions. Another 29 examiners are responsible for conducting specific examinations regarding customer complaints, alleged criminal activities of bank staff, etc, and 8 more are in the internal review team. There are also 13 on-site examiners working in the Risk Management and Financial Consumer Relations Departments, who are not included in regular bank or non-bank institutions’ examinations but they do perform ad hoc examinations that complement the regular supervision. Other expert personnel of the BRSA, including law experts and IT experts who can also be assigned to these groups when it is deemed necessary. The team head usually leads the inspection of the same set of banks for three years while the examiners assigned for the team change every supervisory cycle. There are also 50 examiners that do not belong to the audit departments who are responsible for specific inspections not related to prudential issues. Off-site supervision Off-site supervision activities are carried out analyzing various indicators related to bank’s financial performance in different periods and preparing periodical reports on issues of concern. Data sources include surveillance call reports, regulatory reports, on-site supervision and external audit reports, CBRT and Credit Bureau data, rating agency reports and media. Conclusions are immediately reported to other departments and senior management. The analysis made by the off-site team aims to provide feedback and early warning mechanism for emerging risks for on-site inspection. The off-site supervision department produces various periodic reports and analysis on demand, including stress tests (see CP 10). Off-site supervision activities are performed by 22 supervisors (average 3 banks per banking expert). These activities have been organized under a separate department aiming to strengthen the off-site function, improve efficiency and ensure standardization. Quality assessment The quality assurance system is defined in the article 7 of RAA. According to this article, quality assurance system comprises all processes in the supervision framework and ensures the improvement of quality in BRSA’s inspections as well as the consistency in inspection reports and their alignment with the standards set forth by the BRSA. The quality assurance system aims to continuously improve the inspection standards. The BRSA assesses the compliance of audit systems and products to internationally-accepted principles and standards as a non-integrated part of quality assurance system and provides them to be subject to an independent analysis. The current quality assurance system seems to be focused on the results of individual on-site inspections, ensuring that the procedures followed by the supervisors are in compliance with the relevant manuals. The BRSA has yet to develop policies and processes to assess more broadly the effectiveness and integration of on-site and off-site functions, and to address any weaknesses that are identified. | |||||||||||||||||||||
| EC2 | The supervisor has a coherent process for planning and executing on-site and off-site activities. There are policies and processes to ensure that such activities are conducted on a thorough and consistent basis with clear responsibilities, objectives and outputs, and that there is effective coordination and information sharing between the on-site and off-site functions. | |||||||||||||||||||||
| Description and findings re EC2 | According to Article 10 of RAA, inspection plans are prepared by team leaders, evaluated by the heads of departments and submitted to the approval of the Chairman with the assent of the Vice-Chairman. As described in CP8, the specific scope and extent of the supervision process is determined at the strategic planning phase of the supervisory cycle taking into consideration the findings of previous inspections and current risks evaluations. Inspection plans also include the terms of assignment of the examiners and the duties that they are required to perform. The consistency of the supervisory procedures and process are determined by several supervision manuals. These manuals describe the methods and processes for data collection and evaluation as well as other relevant procedures including the report. According to Article 17 of RAA, at the end of the inspection process, the team prepares an inspection report, or a paper formally explaining the opinions of the examiner or a brief information paper, depending on the nature of the inspection. Inspection reports are reviewed by the heads of the audit departments for their compliance with the regulations and guidelines. Inspection products with deficiencies or wrong interpretations are returned to the related expert personnel for correction (article 18 of RAA). Bank’s data, audit reports and internal and external information sources are used and analyzed as part of off-site supervision activities. The process generates individual bank analysis and sector based thematic reports that are shared with the on-site teams and related enforcement departments. As described on CP 10, the off-site team also monitors the quantitative information provided by banks and notifies the on-site examiners of problems responsible for the bank when needed. Supervisory Manuals also include references to off-site reports to be taken into account during the on-site inspection process. For example, SMCEP requires the on-site inspection team to review the off-site reports during the inspection of the loan portfolio of the bank. Additionally, on-site teams are informed about the names and contact information of the banking experts in the off-site supervision function responsible for the bank under examination. In practice there seems to be a large set of off-site reports as well as a comprehensive database available for the supervision work. On-site supervisors refer to it as a tool to facilitate the comparison of financial information; nevertheless, the assessors could not observe many examples of a deeper exchange of information between the on- and off-site supervisors or joint analyses and projects. | |||||||||||||||||||||
| EC3 | The supervisor uses a variety of information to regularly review and assess the safety and soundness of banks, the evaluation of material risks, and the identification of necessary corrective actions and supervisory actions. This includes information, such as prudential reports, statistical returns, information on a bank’s related entities, and publicly available information. The supervisor determines that information provided by banks is reliable20 and obtains, as necessary, additional information on the banks and their related entities. | |||||||||||||||||||||
| Description and findings re EC3 | The BRSA is empowered by the BL to require banks to submit information on their financial condition, performance, and risks on both solo and consolidated basis. These reports provide information on different issues such as on- and off-balance sheet assets and liabilities, profit and loss accounts, capital adequacy, liquidity, large exposures, asset concentrations, asset quality, loan loss provisioning, related party transactions, interest rate and market risk, FX positions and securities positions. The process of collecting and analyzing information from banks is based on a predetermined frequency (daily, monthly, quarterly, semiannually or annually) commensurate with the nature of the information requested and the size, activities and risk profile of the individual bank. In order to make meaningful comparisons between banks and banking groups, the BRSA collects data from all banks and all relevant entities covered by consolidated supervision on a comparable basis and related to the same dates and periods. These data forms a database which can be easily accessed by supervisors. A number of control procedures are applied to improve data quality. The data source is checked in terms of reliability, correctness and consistency. In this respect, banks’ call reports are checked from different sources and verified throughout the supervision process. The control procedures are applied on both client and server sides to provide consistency of the data. To maintain a regular reporting cycle, the system produces and sends the required warnings to institutions such as expected reports, reporting latency, errors in consistency checks and so on. Completed and consistent reporting sets are locked to protect the data from unauthorized changes. Please refer to CP10 for detailed discussion on information available for the supervision process. | |||||||||||||||||||||
| EC4 | The supervisor uses a variety of tools to regularly review and assess the safety and soundness of banks and the banking system, such as:
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| Description and findings re EC4 | During the supervisory cycle a large number of tools are used to assess and monitor the safety and soundness of banks. See CP 8 above. Using a variety of tools, on-site and off-site supervision perform analysis of financial statements and accounts. Business model analyses are performed in special inspections and, to some extent, within the rating process. Off-site reports with peer group comparisons on a number of subjects are available for on-site supervisors who also conduct horizontal analysis in complementary inspections. The outcome of stress tests undertaken by the banks is reviewed within the context of the ICAAP assessment. Finally, analysis of corporate governance, including risk management and internal control systems are carefully taking into consideration by the on-site team in several phases of the supervisory cycle. Supervisors conduct formal and informal meetings with the bank management as well as other relevant bank personnel and share their opinions on issues such as risk management systems, banks’ financial performance, capital adequacy and any other relevant subject. On-site inspection team members are in contact with institutions’ middle and senior management during the supervision process. The on-site inspection team follows up the correction and/or mitigation of any vulnerability identified during the supervision framework. The supervisory findings, corrected by the bank under inspection prior to the finalization of the supervision cycle, are communicated by the bank to the inspection team. Any uncorrected deficiencies are scrutinized in the inspection reports. These reports are sent to the enforcement department that is responsible for the formal correspondence of examination reports which are sent to the bank. Related inspection teams are informed about bank’s actions with regard to the correction of deficiencies. The assessors observed the communication process between banks and supervisors and consider that there is room for improvement. Initially, communication with the bank’s board could be strengthened. It would be helpful, for instance, setting policies establishing at least one annual meeting between supervisors and the board of the bank. The end of the rating process, when the supervisor summarizes the opinion about the bank, might be an appropriate occasion to explain the supervisors’ views and concerns to the board. Additionally, other important analyses done by the BRSA, such as the stress testing exercises could also be more formally discussed with the banks. Finally, the sharing of communication responsibilities between the audit and the enforcement departments seems to generate a fragmented process that increases the risks that the messages conveyed to the bank do not reflect appropriately supervisory concerns. | |||||||||||||||||||||
| EC5 | The supervisor, in conjunction with other relevant authorities, seeks to identify, assess and mitigate any emerging risks across banks and to the banking system as a whole, potentially including conducting supervisory stress tests (on individual banks or system-wide). The supervisor communicates its findings as appropriate to either banks or the industry and requires banks to take action to mitigate any particular vulnerabilities that have the potential to affect the stability of the banking system, where appropriate. The supervisor uses its analysis to determine follow-up work required, if any. | |||||||||||||||||||||
| Description and findings re EC5 | Stress tests are conducted as a part of the off-site supervision activities. Mainly it is a top down macro stress testing study to assess the resilience of Turkish Banks and the Turkish Banking System to extreme but plausible events. It is based on the Macro Stress Testing Model developed by European Central Bank’s Technical Assistance in 2011. It has been modified to fit the data, needs and approaches peculiar to Turkish banking system. It has also been customized with satellite models. There are two macro scenarios in the model, the baseline scenario and the adverse scenario. Macro scenarios include GDP growth, FX rates, Interest Rates and Unemployment rates. The goal is to estimate how the Turkish banking industry might be affected within a two years period. Each bank is considered in the stress tests on solo basis. Individual results are aggregated to build the industry assessment. The “baseline scenario” is formed by using market expectations extracted from information sources such as CBRT Market Survey and Bloomberg expectations and expert judgment. The “adverse scenario” depends on a “sudden stop” scenario based on a serious increase in rollover in government and private borrowing and a slowdown in international capital flows. This 1st year shock causes pressure on markets and increase interest rates and FX rates, resulting in an economic slowdown. The effects last for 2 years. Main risks included are credit risk, interest rate risk (duration method for trading book, income method for the banking book), exchange rate risk and contagion effects. A major part of the stress testing approach is the satellite (auxiliaries) models used to estimate the growth in the loan portfolio and the increase in the non-performing loans as a function of the macro scenarios for the following two years. The model uses quarterly panel data to estimate growth rates broken down by commercial and retail portfolios. Final results are summarized using changes to the capital adequacy ratio (CAR) that are compared to the 8% and 12% regulatory prescriptions. If the resulting CARs are below these levels, the banks are highlighted together with their potential capital need. On-site inspection teams are informed of the findings of stress tests. Moreover, Core Tier I, Tier I and CAR are evaluated as well. In addition to the Macro Stress Testing Model, several sensitivity and what if analyses are performed. Short term FX and interest rate sensitivities of the Turkish Banking Sector are tested separately. The process includes tests of 10% to 30% increases in FX rates and 100 bps to 300 bps increases in interest. Moreover, loan losses threshold high enough to reduce banks’ CAR below 8% and 12% are examined. Additionally, the effects of “what if all loans under follow up are classified as NPL” are measured for each bank. Stress tests are conducted on a quarterly basis. They are reported internally twice a year and presented to the Chairman, Vice Chairmanships of Supervision and Enforcement. Results are evaluated by on site, off site supervisors and the related BRSA staff internally. Liquidity Tests are only conducted when required by the BRSB. Liquidity tests use the “Implied Cash-flow Test” which tries to estimate how the banking system will be affected under two scenarios applied on a bank by bank basis. The first scenario assumes that there will be no deposit withdrawal within the industry, but there will be a reduction in the non-deposit liabilities due to unrolled foreign funding (1 month remaining maturity foreign borrowings are not renewed). The second scenario adds the assumptions of deposit withdrawals (10% for TRL, 20% for FX deposit) to the first Scenario. In addition, 15% to 50% haircuts are considered for liquid assets. Finally, as part of the ICAAP, banks have to maintain their stress testing programs. This regulation requires banks to have detailed stress testing programs consistent with their size and complexity. Tests for market risk, counterparty credit risk and liquidity risks are required to be conducted at least once a month and bank wide extensive stress tests with all risk factors are required to be conducted at least once a year. Banks are also required to apply the BRSA’s scenarios if given. The RICAAP regulation maintains an interaction between banks’ stress testing results and internal capital adequacy calculations. The BRSA is authorized to enforce banks to mitigate risk or to hold additional reserve depending on the stress test results. ICAAP results with stress testing outputs are collected and examined in the supervision process. The BRSA does not disclose the results of the stress tests to banks. | |||||||||||||||||||||
| EC6 | The supervisor evaluates the work of the bank’s internal audit function, and determines whether, and to what extent, it may rely on the internal auditors’ work to identify areas of potential risk. | |||||||||||||||||||||
| Description and findings re EC6 | An effective internal audit system is one of the requirements for the establishment of a bank in Turkey. According to the article 29 of the BL, banks are obliged to establish and operate adequate and efficient internal audit systems that are compatible with the scope and structure of their activities. The BL also determines the internal audit systems to involve all banks’ units, branches and undertakings subject to consolidation. Banks’ internal auditors must investigate the conformity of the banking activities to the legislation, articles of association, internal regulations and banking principles. Internal audit activities should be performed in an impartial and independent manner exercising due professional care by the adequate number of auditors. Further principles and procedures for the establishment and functioning of the internal control, internal audit, and risk management systems are established in the RICAAP. The RICAAP also gives banks the obligation to report to the BRSA a number of issues related to the internal audit function including but not limited to their internal regulations, organizational structure, audit plans and reports submitted to the board of directors. Compliance with all requirements set out in RICAAP are verified by the BRSA’s supervisors that according to article 14 of the RAA should analyze the adequacy and efficiency of the risk management, internal control and internal audit systems of the banks. During the on-site inspection, supervisors examine whether the internal audit function has sufficient resources, appropriate independence, full access to and communication with any member of staff, employ a methodology that identifies the material risks and prepares an audit plan based on its own risk assessment and allocates its resources accordingly. Financial Soundness Analysis Software Package (FSASP) includes a number of criteria to evaluate the internal audit function of the bank. | |||||||||||||||||||||
| EC7 | The supervisor maintains sufficiently frequent contacts as appropriate with the bank’s Board, non-executive Board members and senior and middle management (including heads of individual business units and control functions) to develop an understanding of and assess matters such as strategy, group structure, corporate governance, performance, capital adequacy, liquidity, asset quality, risk management systems and internal controls. Where necessary, the supervisor challenges the bank’s Board and senior management on the assumptions made in setting strategies and business models. | |||||||||||||||||||||
| Description and findings re EC7 | On-site examiners have frequent formal and informal meetings with different personnel of the bank during their analysis inspections and follow-up. In these meetings conducted with the bank management as well as other relevant bank personnel, supervisors share their opinions on issues such as risk management systems, banks’ financial performance, bank’s strategies, group structure, corporate governance, liquidity, asset quality, capital adequacy and any other relevant subjects. In cases where some important issues are detected, they are immediately reported to BRSA management and the BRSA management organizes formal meetings with the bank upper management to discuss such issues. Additionally, the RAA provides a framework for more official contact. Heads of audit departments are formally responsible for organizing official meetings to be held with institutions under the supervisory and regulatory framework of the BRSA and with institutions providing service to these institutions. It also stipulates that, within the framework of carrying out risk evaluations and building up the risk profile of the institutions, inspections should be preceded by introductory meetings with the management of the bank. Along the same lines, according to SMBSP, in the process of IRA, the on-site inspection team collects the information required for completing the supervision plans and makes introductory meetings with the bank management. There are also explicit requirements for inspection findings to be shared with the bank management in conclusion meetings under the coordination of the Group Head. The purpose of the conclusion meeting is to receive the opinions of the bank management about inspection findings and conclude the inspection report taking into account these opinions to the extent necessary. Banks confirmed that supervisors maintain regular communications with them. Although it was clear that supervisors have access to all levels of staff in the bank, as discussed in EC4, there is opportunity for improvement in terms of frequency of meetings with the board and in the issues disclosed and discussed. | |||||||||||||||||||||
| EC8 | The supervisor communicates to the bank the findings of its on- and off-site supervisory analyses in a timely manner by means of written reports or through discussions or meetings with the bank’s management. The supervisor meets with the bank’s senior management and the Board to discuss the results of supervisory examinations and the external audits, as appropriate. The supervisor also meets separately with the bank’s independent Board members, as necessary. | |||||||||||||||||||||
| Description and findings re EC8 | As discussed in EC 4, 5 and 7, the BRSA maintains regular communication with the bank by means of written reports and through discussion with the management. Nevertheless, as previously mentioned, there seems to be room for improvement, particularly concerning establishing a policy for minimum frequency of meetings with board members and communication of off-site findings like stress test results. | |||||||||||||||||||||
| EC9 | The supervisor undertakes appropriate and timely follow-up to check that banks have addressed supervisory concerns or implemented requirements communicated to them. This includes early escalation to the appropriate level of the supervisory authority and to the bank’s Board if action points are not addressed in an adequate or timely manner. | |||||||||||||||||||||
| Description and findings re EC9 | The BRSA has a broad range of powers to impose remedial actions and escalate it as needed. For a detailed discussion see CP1. Remedial measures are addressed to the banks’ Board in a written document and banks are required to prepare a rehabilitation plan within a time period and a framework approved by the BRSA. The bank should submit regular written progress reports according to the plan that is approved and the severity of the matter. Progress reports are regularly monitored by the BRSA and shared with the supervision departments to follow up whether remedial actions have been completed satisfactorily. When important issues have not been addressed, they are immediately reported to BRSA management that takes the appropriate measures. | |||||||||||||||||||||
| EC10 | The supervisor requires banks to notify it in advance of any substantive changes in their activities, structure and overall condition, or as soon as they become aware of any material adverse developments, including breach of legal or prudential requirements. | |||||||||||||||||||||
| Description and findings re EC10 | The regulatory framework in Turkey demands banks to notify the BRSA in a number of changes and material developments. Article 43 of the BL demands notification in case the restrictions and threshold related to the standard ratios set in BL are breached. The RICAAP requires banks to notify or to submit to the BRSA a number of topics including: i) appointment or resign of the internal systems manager or committee members, the members of the audit committee, and the senior managers of the units included within the scope of these systems; ii) changes to internal regulations concerning the duties, powers and responsibilities of the audit committee and of the internal systems manager and the organizational structure, duties, powers and responsibilities of the internal audit unit, the risk management unit and the internal control unit; iii) changes in their approved risk management policies and implementation procedures as well as their new strategy and policy texts; iv) internal audit plans and the risk assessments used in these plans; v) internal audit unit reports submitted to the board of directors; vi) ICAAP reports; vii) stress test report; viii) Internal model validation report, Additionally, the RICAAP demands banks to promptly submit to the BRSA an action plan when the current capital adequacy ratio is below the internal capital requirement ratio (ICRR). The plan enters into practice after being approved by the Agency. At the end of the period foreseen in the plan, a new ICAAP Report is prepared and results of the action plan are submitted to the Agency. | |||||||||||||||||||||
| EC11 | The supervisor may make use of independent third parties, such as auditors, provided there is a clear and detailed mandate for the work. However, the supervisor cannot outsource its prudential responsibilities to third parties. When using third parties, the supervisor assesses whether the output can be relied upon to the degree intended and takes into consideration the biases that may influence third parties. | |||||||||||||||||||||
| Description and findings re EC11 | According to Article 95 of the BL, the chairman of the BRSA has the authority to commission independent audit firms to examine specific matters that require expertise where he or she deems necessary. However, the BRSA is not legally authorized to outsource its prudential responsibilities to third parties. Third parties are not extensively used for supervision purposes. Information Systems is one of the few areas where there is a more relevant reliance on external audit firms. External auditors are utilized for annual audits which are defined in RITEA after being previously approved by the BRSA. Their reports are evaluated by BRSA experts that subsequently send an official letter informing banks about the evaluation results and deadlines for the corrective actions. The BRSA has the authority to monitor the quality of work done by external auditors for supervisory purposes. According to Article 17 of the Regulation on the External Audit of Banks (REAB), external audit firms are obliged to send to the BRSA all information and documents related to their audit when it is demanded and should keep them ready for the BRSA supervision. | |||||||||||||||||||||
| EC12 | The supervisor has an adequate information system which facilitates the processing, monitoring and analysis of prudential information. The system aids the identification of areas requiring follow-up action. | |||||||||||||||||||||
| Description and findings re EC12 | The BRSA utilizes an information system specially designed to support the whole supervisory cycle. The FSASP supports all the steps of process including IRA, SI and CRRE. The software comprises both risk assessment and CAMELS rating modules in harmonization with the supervision manuals. It also includes criteria (via questions) to be assessed during the on-site inspection process. The FSASP stipulates the working papers to be recorded. It also allows supervisors to produce risk profile and risk matrix of the banks. In addition, the final rating of the bank is also derived from the assessments in that software. This information is used for follow up actions. Banks data are also stored in appropriate databases that allow supervisors to develop queries for analyzing prudential issues relatively easily. Please also refer to the BCP 10 for detailed reporting structure. | |||||||||||||||||||||
| Additional criteria | ||||||||||||||||||||||
| AC1 | The supervisor has a framework for periodic independent review, for example by an internal audit function or third party assessor, of the adequacy and effectiveness of the range of its available supervisory tools and their use, and makes changes as appropriate. | |||||||||||||||||||||
| Description and findings re AC1 | ||||||||||||||||||||||
| Assessment of Principle 9 | Largely Compliant | |||||||||||||||||||||
| Comments | The BRSA employs an array of tools and techniques to carry out its supervisory responsibilities. On-site and off-site functions are relevant and well developed. The different departments also share their findings with each other, but their work seems to be conducted in parallel with little coordination. The departments do not seem to have joint projects and supervisors rarely exchange views beyond written reports. As required by EC1, it is important for the BRSA to develop policies and processes to assess the effectiveness and integration of on-site and off-site functions, and to address any weaknesses that are identified. Increasing the rotation between on- and off- site supervisors could also help the integration of the areas. Communication with banks could also be improved. The BRSA should consider setting policies establishing at least one annual meeting between supervisors and the board of the bank. The end of the CAMELS rating process, when the supervisor summarizes its opinion of the bank, might be an appropriate occasion to explain to the board the views and concerns of the BRSA. The assessors understand that this is frequently done, but not systematically with all banks. Additionally, other important analyses done by the BRSA, such as the stress testing exercises could also be more clearly discussed with banks. | |||||||||||||||||||||
| Principle 10 | Supervisory reporting. The supervisor collects, reviews and analyses prudential reports and statistical returns21 from banks on both a solo and a consolidated basis, and independently verifies these reports through either on-site examinations or use of external experts. | |||||||||||||||||||||
| Essential criteria | ||||||||||||||||||||||
| EC1 | The supervisor has the power22 to require banks to submit information, on both a solo and a consolidated basis, on their financial condition, performance, and risks, on demand and at regular intervals. These reports provide information such as on- and off-balance sheet assets and liabilities, profit and loss, capital adequacy, liquidity, large exposures, risk concentrations (including by economic sector, geography and currency), asset quality, loan loss provisioning, related party transactions, interest rate risk, and market risk. | |||||||||||||||||||||
| Description and findings re EC1 | Articles 95 and 96 of the BL authorize the BRSA to obtain information from the institutions under the scope of the law on both a solo and consolidated basis. Banks are required to provide the BRSA, timely and properly, any consolidated and non-consolidated information, document, report or financial statements. The information should be provided consistently with their accounts and record keeping systems, within the framework of the principles and procedures set forth by the BRSB. The BL also authorizes the BRSA to request any information including those classified as confidential, where they are deemed necessary for the provisions of the BL, from banks and their subsidiaries, from the undertakings where they hold qualified shares, from the undertakings they control jointly, their branches and representative offices, their outsourcing institutions and from other real and legal entities; to review their ledgers, records and documents including the ones related to taxation; keep their ledgers, records and documents ready for inspection; make their information systems available to the expert staff of the BRSA responsible for on-site supervision; ensure the security of their data; and submit all the ledgers, records and statements that they have to keep as well as the microchips, micro film, magnetic tapes, compact disks and other records for inspection. Based on these provisions of the BL, the BRSA require banks to periodically transmit data on solo and consolidated reports, including reports of their subsidiaries operating abroad and their shareholders. Banks’ reporting frequencies varies from daily to annually. The periodicity of the requested reports is determined taking into consideration basic elements such as the information needs on supervision activities of the bank, the importance of data in analyzing the financial performance or risk structure of the banks, the importance or the size of the bank in the financial system, and the product diversity of the financial institution. The most important data reported by banks on consolidated and solo basis to the BRSA’s database, are as follows: Surveillance Reporting Set: includes broad range of summary and detailed information on daily, weekly, monthly, quarterly, semiannual and annual intervals in order to monitor the financial conditions of banks as well as their compliance with relevant regulation. The BRSA receives on a daily basis, for example, reports on the stock volume of some major on and off balance sheet items, details of the securities portfolio, the transaction based derivatives details, the custody services regarding securities, and the volumes and currency type of foreign currency transactions. The BRSA also receives some reports on weekly basis providing information about foreign currency position, consumer loans types and volumes, liquidity positions, details of securities kept in the banks’ accounts, including the names of the banks and the customers, details of repo transactions. In addition to these daily and weekly reports, monthly reports cover the largest part of the surveillance reporting set. The main financial tables are balance sheet, income statement, and various detailed and aggregated reports of loan portfolio, detailed information on subsidiaries, securities issuance and shareholders, general ledger, related parties and positions with other financial institutions. Basel Reporting Set: includes own funds, capital adequacy, LCR and sub forms related to different risk categories (credit, market, operational etc.). Additionally, BRSA requires banks to prepare a detailed form named “Detailed Credit Risk Assessment Form-AKRİF” to see the steps for risk weighted asset calculation for credit risk. Since the size of the report is too large, banks keep it ready for on-site inspection. Cross Border Organizations Reporting Set: includes narrow range of summary and detailed information on quarterly intervals for cross border financial subsidiaries and off-shore branches of banks established in Turkey (balance sheet, profit/loss, loans, financial sector relations, derivatives, interest rates, investments in associates, capital adequacy, repo, FX position etc.). Banks’ Shareholders Reporting Set: includes main financial tables (balance sheet and income statements), shareholders list and ratio of each bank shareholder, and the set should be reported for both domestic and foreign shareholders. Non-Bank Financial Institutions Reporting Set: includes information, on a quarterly basis, in order to monitor the financial conditions of non-bank financial institutions as well as their compliance with relevant regulation. External audit reports and notes to financial statements are the main sources of consolidated information about asset concentrations by economic sector, geographical location and currency type. The BRSA does not collect regular reports directly from non-financial subsidiaries of the banks. However, semiannual consolidated reports include non-financial subsidiaries and affiliates which are prepared with a wider scope in addition to quarterly consolidated reports. | |||||||||||||||||||||
| EC2 | The supervisor provides reporting instructions that clearly describe the accounting standards to be used in preparing supervisory reports. Such standards are based on accounting principles and rules that are widely accepted internationally. | |||||||||||||||||||||
| Description and findings re EC2 | Based on the provisions of the BL, the RAP establishes the Turkish banking system’s accounting practices in line with the TFRS which is issued by the POA as the Turkish transposition of the IFRS. The BCP assessors were informed that the main difference between the implementation of IFRS and TFRS in banks and financial institutions is in loan loss provisioning standards. For loan loss provisioning Turkish banks apply REPL instead of impairment requirements of TAS 39 or IAS 39. The BRSA is planning to apply IFRS 9, including the impairment rules from 1 January 2017. By 2017, Turkish banks may choose to implement either the REPL or amended REPL that allows the use of TFRS 9. The content and format of each report that banks are required to submit to the BRSA are appropriately documented in template files and instructions manual. Instructions for supervisory reporting and public disclosure of financial statements clearly demand the use of the TFRS. | |||||||||||||||||||||
| EC3 | The supervisor requires banks to have sound governance structures and control processes for methodologies that produce valuations. The measurement of fair values maximizes the use of relevant and reliable inputs and is consistently applied for risk management and reporting purposes. The valuation framework and control procedures are subject to adequate independent validation and verification, either internally or by an external expert. The supervisor assesses whether the valuation used for regulatory purposes is reliable and prudent. Where the supervisor determines that valuations are not sufficiently prudent, the supervisor requires the bank to make adjustments to its reporting for capital adequacy or regulatory reporting purposes. | |||||||||||||||||||||
| Description and findings re EC3 | As described in EC2, Turkish banks apply TFRS that are a transposition of IFRS. Valuation procedures also follow TFRS. The BRSA provides banks further guidance on valuation methodologies on “Guideline On Fair Value Measurement” (GFVM). The guidelines require banks to maintain a broad set of practices compatible with international practices on governance, internal controls, independent validation, use of data, determination of valuation adjustments, dealing with uncertainties of the valuation process and consistent use of the results. In addition to this, there is a section specific to financial instrument fair value practices at Guideline on The Assessment Criteria Considered in the Audits to be Performed by the Agency (GAA). Supervisory procedures established in the GAR include the assessment of the valuation process. The assessment includes the adequacy of information and documentation, the appropriateness of the banks’ management governance on the valuation process, including the understanding of the methodologies and deficiencies in the process. During inspections, if the team determines that valuations are not sufficiently prudent, the bank is instructed to make necessary adjustments to its regulatory reporting based on Article 37(3) of BL and Article 31(2) of Regulation on Measurement and Assessment of Capital Adequacy of Banks (RCA). Additionally, according to Article 12(1) of the Regulation on the Principles regarding the Authorization and Activities of Valuation Firms (RAAVF), the BRSA is authorized to require the bank to verify its valuation framework by an independent valuation firm, where it is deemed necessary. | |||||||||||||||||||||
| EC4 | The supervisor collects and analyses information from banks at a frequency commensurate with the nature of the information requested, and the risk profile and systemic importance of the bank. | |||||||||||||||||||||
| Description and findings re EC4 | Based on the provisions of the BL, the BRSA requests, collects and analyses several information reports. As explained in EC1, reporting frequencies varies from daily to annually. The frequency of the requested reports is determined taking into consideration basic elements such as the nature of the information, the information needs on supervision activities of the bank, the importance of data in analyzing the financial performance or risk structure of the banks and the product diversity of the financial institution. The report frequencies stipulated in the regulation do not differ among banks, except from reports related to the type of bank. However, the analysis of information differs depending on general market conditions, the individual condition of the bank, risk profile and size of the bank. As way of example, while normal frequency for off-site financial condition report is on a quarterly basis, in case of a market turbulence or existence of a problem related to the financial condition of a specific bank, off-site reports can be prepared on a daily basis. In addition to periodic reporting and analyzing, on demand reporting and monitoring can also be intensified in case of institution specific or sector wide risks. Authorities mentioned that during the political crisis between Turkey and Russian Federation in the last quarter of 2015, some banks were required to submit detailed risk assessments about their Russia related country risks and the recent financial condition of their financial subsidiaries in Russia. An off-site supervision report called “Turkish Banking Sector-Russia Risks” was also prepared in order to see the extent of country risk. | |||||||||||||||||||||
| EC5 | In order to make meaningful comparisons between banks and banking groups, the supervisor collects data from all banks and all relevant entities covered by consolidated supervision on a comparable basis and related to the same dates (stock data) and periods (flow data). | |||||||||||||||||||||
| Description and findings re EC5 | See above ECs. The requirement of reports stipulated by the BRSA applies to all banks on a consolidated and non-consolidated basis in the same manner in terms of the content and frequency. | |||||||||||||||||||||
| EC6 | The supervisor has the power to request and receive any relevant information from banks, as well as any entities in the wider group, irrespective of their activities, where the supervisor believes that it is material to the condition of the bank or banking group, or to the assessment of the risks of the bank or banking group or is needed to support resolution planning. This includes internal management information. | |||||||||||||||||||||
| Description and findings re EC6 | As described in EC1, the BL provides the BRSA the power to obtain information from the institutions under the scope of the BL on both a solo and consolidated basis, including those classified as confidential, where they are deemed necessary to fulfill its mandate. This access to information include banks and their subsidiaries, the undertakings where they hold qualified shares, the undertakings they control jointly, their branches and representative offices, their outsourcing institutions and from other real and legal entities. Most supervisory reports are required on both solo and consolidated versions and compiled on the same date, providing comparable information for analysis. | |||||||||||||||||||||
| EC7 | The supervisor has the power to access23 all bank records for the furtherance of supervisory work. The supervisor also has similar access to the bank’s Board, management and staff, when required. | |||||||||||||||||||||
| Description and findings re EC7 | The BRSA has a full and wide access to records about the institutions under its supervision pursuant to Articles 95 and 96 of the BL (see EC 1 and 6 for details). Access to banks’ staff is also facilitated in practice by the on-going presence of the BRSA within individual institutions. Please refer also to CP9. | |||||||||||||||||||||
| EC8 | The supervisor has a means of enforcing compliance with the requirement that the information be submitted on a timely and accurate basis. The supervisor determines the appropriate level of the bank’s senior management is responsible for the accuracy of supervisory returns, imposes sanctions for misreporting and persistent errors, and requires that inaccurate information be amended. | |||||||||||||||||||||
| Description and findings re EC8 | Article 39 of the BL addresses the responsibility for the accuracy of supervisory returns. The requested financial reports prepared by banks shall be signed, with names, surnames and titles indicated, by the chairman of the board of directors, the members of the audit committee, general manager, deputy general manager responsible for financial reporting as well as the relevant unit manager or equivalent authorities. They must declare that the financial report is in compliance with the legislation pertaining to financial reporting and with the accounting records. The signing responsibility shall be fulfilled by the members of the board of branches in Turkey of banks established abroad. Pursuant to Article 146 of the BL, the BRSA is authorized to impose administrative fines from 5,000 TL to 15,000 TL24 in cases of failure to submit the information requested by the BRSA, from 5,000 TL to 10,000 TL in case of late submission of such information, and from 5,000 TL to 15,000 TL in case of missing information, control errors or recurring control errors. Late and non submitted reports are detected by the electronic data transfer system, while erroneous information is checked using cross controls. The Communiqué on the Principles and Procedures for the Administrative Fines to be Imposed on Reportings Made Within the Scope of Banking Data Transfer System (CAFBDTS) explains how and when administrative fines are applied. The BRSA has applied administrative fines to banks breaching the regulation several times. | |||||||||||||||||||||
| EC9 | The supervisor utilizes policies and procedures to determine the validity and integrity of supervisory information. This includes a program for the periodic verification of supervisory returns by means either of the supervisor’s own staff or of external experts.25 | |||||||||||||||||||||
| Description and findings re EC9 | BRSA receives most periodic reports via electronic data transfer system and automatic controls procedures are applied to each received report. These controls consist of formal, logical and mathematical checks within and cross different forms. After passing through intra form controls successfully and reaching the BRSA’s database, reports are subject to cross controls and, if there are no reporting errors, the system sends a confirmation message to the sender of the data informing on the successful transfer of the data. If the system detects errors, banks are required to correct them. The BRSA also perform special inspections that aim to guarantee the quality of the data provided by banks. Additionally, if errors are found during off-site and on-site inspections, banks are instructed to correct them immediately. Banks reporting erroneous information are also subject to administrative fines. | |||||||||||||||||||||
| EC10 | The supervisor clearly defines and documents the roles and responsibilities of external experts,26 including the scope of the work, when they are appointed to conduct supervisory tasks. The supervisor assesses the suitability of experts for the designated task(s) and the quality of the work and takes into consideration conflicts of interest that could influence the output/recommendations by external experts. External experts may be utilized for routine validation or to examine specific aspects of banks’ operations. | |||||||||||||||||||||
| Description and findings re EC10 | See also CP9. Article 95 of the BL allows the BRSA to supplement its audits by external experts. The Chairman has the authority to commission external audit firms to examine specific matters that require expertise where it is deemed necessary. This can either be an expansion of the normal audit, or a special audit. The work is commissioned by the BRSA but paid for by the bank. The auditors of external audit firms bear the powers restricted only to audit-related matters, and shall be subject to the obligation of keeping the confidentiality of information and documents conveyed by the BL. According to Article 33 of the BL, among the audit firms authorized by POA, BRSA has the authority to set additional criteria for the firms that will perform external audits on banks. REAB sets the additional criteria for firms that will audit banks’ financial reports. The audit firms which meet the additional criteria are licensed by the BRSA and the list of the licensed firms are disclosed to the public in BRSA website. The regulation also defines the scope of the external audit as well as the roles and responsibilities of external audit firms. If, as a result of supervision, it is determined that the audit firm does not comply with the regulation, the license of the firm is revoked by BRSA. According to the same regulation, external audit firms may conduct special audit activities, upon the request by the BRSA pursuant to Article 95 of the BL mentioned above. The external audit firms that may conduct information systems audit are also licensed by BRSA. Please also refer to CP9, EC11. | |||||||||||||||||||||
| EC11 | The supervisor requires that external experts bring to its attention promptly any material shortcomings identified during the course of any work undertaken by them for supervisory purposes. | |||||||||||||||||||||
| Description and findings re EC11 | Article 33 of BL and article 17 of the REAB requires external auditors to promptly inform the BRSA of any material shortcomings identified during the course of their work. | |||||||||||||||||||||
| EC12 | The supervisor has a process in place to periodically review the information collected to determine that it satisfies a supervisory need. | |||||||||||||||||||||
| Description and findings re EC12 | The BRSA periodically reviews the information collected, but the process could be better structured. Coordination within the BRSA generally occurs through receiving a new report or a new data set due to additional informational needs. As a result, data sets in the database are subject to frequent updates. Any data or report can be ended due to the cease of supervisory needs for the data or due to the fact that a more detailed information is already been collected. The BRSA also makes an effort to catch and follow new product types or to analyze their effects to the financial conditions of the banks. As an example, authorities mentioned the derivative transactions form as one of the most updated forms recently. | |||||||||||||||||||||
| Assessment re Principle 10 | Compliant | |||||||||||||||||||||
| Comments | The regulatory framework requires banks and controlling companies to periodically submit a broad range of information. Regulatory and supervisory processes exist to ensure accuracy and comparability of submitted returns. Developed procedures for analyzing collected information and feeding into supervisory activities are in place. Going forward the BRSA could consider formalizing the review of the information collected, to determine that it remains appropriate and satisfies its needs. | |||||||||||||||||||||
| Principle 11 | Corrective and sanctioning powers of supervisors. The supervisor acts at an early stage to address unsafe and unsound practices or activities that could pose risks to banks or to the banking system. The supervisor has at its disposal an adequate range of supervisory tools to bring about timely corrective actions. This includes the ability to revoke the banking license or to recommend its revocation. | |||||||||||||||||||||
| Essential criteria | ||||||||||||||||||||||
| EC1 | The supervisor raises supervisory concerns with the bank’s management or, where appropriate, the bank’s Board, at an early stage, and requires that these concerns be addressed in a timely manner. Where the supervisor requires the bank to take significant corrective actions, these are addressed in a written document to the bank’s Board. The supervisor requires the bank to submit regular written progress reports and checks that corrective actions are completed satisfactorily. The supervisor follows through conclusively and in a timely manner on matters that are identified. | |||||||||||||||||||||
| Description and findings re EC1 | The BRSA maintains a constant communication between inspection teams and the representatives of the different levels of the bank. According to supervision manuals, inspection teams are expected to communicate their findings to bank’s top management, audit committee members and some of the directors before finalizing their report during special inspections, CAMELS rating or risk assessment. Additionally, the BRSA sends an official letter after inspection reports are finalized. As discussed in CP1 and EC2 bellow, the BRSA has broad powers to determine corrective and remedial actions. In these situations, supervisory determinations are addressed to the banks’ board in a written document. Banks are expected to respond preparing a rehabilitation plan within a time period and a framework determined by the BRSA. Finally, the bank should submit regular written progress reports that are used to monitor if the remedial actions were implemented satisfactorily. Nevertheless, the review of supervisory files, including feedback and corrective actions, as well as discussion with banks by the assessors have not provided evidence of a supervisory approach that raises concerns at an early stage to enable them to be addressed, particular on issues that are more dependent of supervisory judgment. The assessors could see several examples of letters requiring banks to make adjustments but the scope of the letters were mostly limited to specific issues that were in out of line with the regulation. Actions addressing more broad supervisory concerns about banks’ financial soundness or unsafe practices at an early stage were not observed. Asked about feedback from supervisors, banks mentioned the result of the CAMELS rating as important information but they were unable to point to criticisms made by supervisors arising out of the process. The supervisory review process within the BRSA also seems to play a role that limits the issues that supervisors raise with banks. On-site supervisory reports are subject to a number of reviews within the audit department and the enforcement department. Although reviews of supervisory reports are necessary, the current process seems long and relatively skewed towards checking compliance rather than supporting supervisory judgements and actions. Supervisors are much more likely to be questioned and challenged when suggesting a corrective measure than when they do not raise concerns. Consideration could also be given to integration of supervision and enforcement which might support a more risk focused and less compliance based supervisory approach. | |||||||||||||||||||||
| EC2 | The supervisor has available27 an appropriate range of supervisory tools for use when, in the supervisor’s judgment, a bank is not complying with laws, regulations or supervisory actions, is engaged in unsafe or unsound practices or in activities that could pose risks to the bank or the banking system, or when the interests of depositors are otherwise threatened. | |||||||||||||||||||||
| Description and findings re EC2 | The BRSA has available an appropriate range of supervisory tools for use when, in the supervisor’s judgment, a bank is not complying with laws, regulations or supervisory decisions, or is engaged in unsafe or unsound practices. These tools include the ability to require a bank to take prompt remedial action (Article 68, 69, 70 of BL) and to impose administrative fines (Article 146-148 of BL). As described in CP1, the situations defined in the BL when the BRSA can take corrective actions are broad and allow for early measures. The bank subject to remedial and corrective actions, should prepare a rehabilitation plan within the framework determined by the BRSA. The bank should submit regular written progress reports that are used to monitor if the remedial actions were implemented satisfactorily. In practice the remedial and corrective actions provided for in the law are rarely used. During the last five years there was just one case. The BRSA seems to rely more heavily on administrative fines whose scope of application is more clearly defined in the BL. | |||||||||||||||||||||
| EC3 | The supervisor has the power to act where a bank falls below established regulatory threshold requirements, including prescribed regulatory ratios or measurements. The supervisor also has the power to intervene at an early stage to require a bank to take action to prevent it from reaching its regulatory threshold requirements. The supervisor has a range of options to address such scenarios. | |||||||||||||||||||||
| Description and findings re EC3 | According to Article 67 of the BL, the corrective measures laid down in the BL Articles 68, 69 and 70 shall be taken promptly against the relevant bank if, as a result of consolidated or non-consolidated supervision, it is determined that:
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| EC4 | The supervisor has available a broad range of possible measures to address, at an early stage, such scenarios as described in essential criterion 2 above. These measures include the ability to require a bank to take timely corrective action or to impose sanctions expeditiously. In practice, the range of measures is applied in accordance with the gravity of a situation. The supervisor provides clear prudential objectives or sets out the actions to be taken, which may include restricting the current activities of the bank, imposing more stringent prudential limits and requirements, withholding approval of new activities or acquisitions, restricting or suspending payments to shareholders or share repurchases, restricting asset transfers, barring individuals from the banking sector, replacing or restricting the powers of managers, Board members or controlling owners, facilitating a takeover by or merger with a healthier institution, providing for the interim management of the bank, and revoking or recommending the revocation of the banking license. | |||||||||||||||||||||
| Description and findings re EC4 | As described in EC3 the range of scenarios defined in the BL for supervisory remedial actions allow measures to be taken at an early stage. The bank subject to these actions, should prepare a rehabilitation plan within a framework determined by the BRSA. As described in CP 1, remedial and corrective actions set by article 68, 69 and 70 of the BL allow their application according to the gravity of the situation. The broad range of possible actions also allows supervisors to appropriately set prudential objective and act to safeguard the banking system. The measures listed in article 68 of the BL includes, among other provisions, that the BRSA is allowed to require banks to increase the amount of the bank’s own funds, suspend the distribution of profits, increase loan loss provisions, ensure liquidity by selling off assets, restrict or stop new investments and restrict payments. Additionally, according to article 71 of the BL, the BRSA board is authorized to revoke the operating permissions of that bank or to transfer the shareholder rights except dividends, and the management and supervision of the bank to the SDIF, for the purposes of transferring, selling or merging them partially or fully, on condition that the loss will be deducted from the capital of the existing shareholders. | |||||||||||||||||||||
| EC5 | The supervisor applies sanctions not only to the bank but, when and if necessary, also to management and/or the Board, or individuals therein. | |||||||||||||||||||||
| Description and findings re EC5 | There are several provisions in the BL that allows the BRSA to impose sanctions not only to the bank but also to management and the Board. Article 147 of the BL allows the BRSA to impose financial penalties against relevant persons if they commit certain violations. Article 69 of the BL, provides the possibility to apply sanctions to individuals. The BRSA may require a bank to call on the shareholders meeting to convene extraordinarily to change one or more of the members of board of directors, or to appoint new members by increasing the number of board members, if the members have responsibility in the decision taken, transactions made and practices applied, or to dismiss responsible employees. Also, according to restrictive measures in article 70, BRSA may request a bank to dismiss some or all of the general managers, deputy general managers, relevant unit and branch directors including board of directors, and to get the approval of the BRSA for new recruitments for the emptied positions or the seats. According to the Article 110 of the BL, if it is determined that the managers and auditors of a bank, or its general manager and assistant general managers, or its authorized signatory officers have caused the application of the provisions of Article 71 for the bank through their decisions and actions that are in violation of the applicable laws, on the basis of a decision of SDIF Board and upon the request of the SDIF, such person shall be held personally liable to the extent of the damage they have caused to the bank and a court may declare any such person bankrupt. Finally, article 26 of the BL establishes that persons who have been declared bankrupt or hold control in banks that have been subjected to restrictive measures, liquidation, or whose operating permissions have been revoked, cannot work at any bank as general manager, deputy general manager or in a position wherein they have signing authority. Additionally, the signing authority of any bank employee, who is found to have infringed provisions of the BL or other applicable laws, might be temporarily revoked upon the BRSB’s decision. Such persons may not be employed by any bank as an employee vested with signing authorities unless permitted by the BRSB. | |||||||||||||||||||||
| EC6 | The supervisor has the power to take corrective actions, including ring-fencing of the bank from the actions of parent companies, subsidiaries, parallel-owned banking structures and other related entities in matters that could impair the safety and soundness of the bank or the banking system. | |||||||||||||||||||||
| Description and findings re EC6 | As described in CP1, articles 68, 69 and 70 of the BL can be used to implement wide ranging corrective actions on banks and controlling companies. For example, these powers could be used to restrict the subsidiary’s dividend payment to its controlling company, the subsidiary exposure to the controlling company or to its related entities, or the controlling company’s exercise of its shareholder’s right over the bank. | |||||||||||||||||||||
| EC7 | The supervisor cooperates and collaborates with relevant authorities in deciding when and how to effect the orderly resolution of a problem bank situation (which could include closure, or assisting in restructuring, or merger with a stronger institution). | |||||||||||||||||||||
| Description and findings re EC7 | There is regular exchange of information between the BRSA and the SDIF that enables the SDIF to access supervisory information of individual banks. In accordance with article 100 of the BL, a Coordination Committee has been established between the two institutions. This Committee meets at least once every three months to further promote the exchange of information and high-level cooperation between the two institutions. Furthermore, the BL determines that the BRSA and the SDIF shall have access to jointly-agreed databases of each other within the principles of confidentiality. In addition, according to the protocol signed between the BRSA and the SDIF, the BRSA notifies the SDIF that a bank has been required to take corrective, rehabilitative, or restrictive measures (Articles 68, 69, and 70). The timely notification allows SDIF to develop a Resolution Action Plan and prepare for the eventual process. As it is explained in CP1 once the BRSA determines that the conditions for intervention are met in relation to a bank, it has two options: to revoke the bank’s operating permission (Article 106 of the BL) or to transfer the shareholder rights (except dividends) and its management and control to the SDIF (Article 107 of the BL). In the second case, the SDIF can select and implement any resolution strategy that falls within its statutory remit, and cooperates with other authorities – primarily the BRSA – during the resolution process. The BRSA retains its supervisory and regulatory authority over a bank in resolution under SDIF management. | |||||||||||||||||||||
| Additional criteria | ||||||||||||||||||||||
| AC1 | Laws or regulations guard against the supervisor unduly delaying appropriate corrective actions. | |||||||||||||||||||||
| Description and findings re AC1 | ||||||||||||||||||||||
| AC2 | When taking formal corrective action in relation to a bank, the supervisor informs the supervisor of non-bank related financial entities of its actions and, where appropriate, coordinates its actions with them. | |||||||||||||||||||||
| Description and findings re AC2 | ||||||||||||||||||||||
| Assessment re principle 11 | Largely Compliant | |||||||||||||||||||||
| Comments | The BRSA has available an appropriate range of supervisory tools to use when, in the supervisor’s judgment, a bank is not complying with the regulations or represents a risk for the financial sector. Nevertheless, in practice, the remedial and corrective actions provided for in the law are rarely used at an early stage as preventative measures. The BRSA seems to rely more heavily on administrative fines whose scope of application is more clearly defined in the BL than on taking actions at an early stage to address unsafe and unsound practices that require supervisory judgment. The assessors were presented evidence of BRSA actions requiring banks to make adjustments to practices and processes. Nevertheless, such action had a scope limited to specific issues such as the classification of particular loans operations. Evidence was not observed of supervisors addressing broader concerns about the risks posed and faced by banks from a deepening and expansion of the initial review, a point reinforced in the comments of banks. The supervisory review process within the BRSA also seems to play a role towards limiting the issues that supervisors raise with banks. Although reviews of supervisory reports are necessary, the current process seems relatively skewed towards validation of compliance processes and thus constrains active supervisory judgments and decisions. Consideration could also be given to integration of supervision and enforcement, particularly in terms of communication with financial institutions, which might support a more risk focused and less compliance based supervisory approach. In order to become fully compliant with this principle the BRSA needs to incorporate the results of forward looking tools more heavily in its decision making process and act at an early stage to restore weak banks and correct examples of unsound practices, even if formal prudential ratios haven’t been breached. | |||||||||||||||||||||
| Principle 12 | Consolidated supervision. An essential element of banking supervision is that the supervisor supervises the banking group on a consolidated basis, adequately monitoring and, as appropriate, applying prudential standards to all aspects of the business conducted by the banking group worldwide.28 | |||||||||||||||||||||
| Essential criteria | ||||||||||||||||||||||
| EC1 | The supervisor understands the overall structure of the banking group and is familiar with all the material activities (including non-banking activities) conducted by entities in the wider group, both domestic and cross-border. The supervisor understands and assesses how group-wide risks are managed and takes action when risks arising from the banking group and other entities in the wider group, in particular contagion and reputation risks, may jeopardize the safety and soundness of the bank and the banking system. | |||||||||||||||||||||
| Description and findings re EC1 | The BL provide powers and responsibilities for the BRSA to supervise bank groups on a consolidated basis: - Article 66 states that parent banks are subject to limitations and standard ratios on a consolidated basis and to consolidated supervision. - Articles 95 and 96 of the BL, authorizes the BRSA to request all necessary documentation and information from the parent company of a banking group as well as the entities within the group to perform its duties. The law also allows the collection of information from banks’ shareholder and therefore includes banks ‘parent companies even if they are not financial companies. - Financial holding companies are also subject to consolidated supervision pursuant to Article 78 of the BL. Based on the authority provided by the BL, the BRSA has issued guidance on the preparation of consolidated financial statements of banks. The CCFS states that parent banks are obliged to prepare consolidated financial statements quarterly considering the financial subsidiaries of the group and semi-annually including financial and non-financial subsidiaries. Financial subsidiaries include insurance firms. The consolidated financial statements and reports are used for calculating regulatory ratios and limits. The BRSA request an extensive amount of information about the group. Intra group transactions are monitored by off-site supervisors through monthly call reports. Banks also regularly report and update the names of all real and legal persons in their own risk group, including their shareholders, affiliates and subsidiaries on a monthly basis. Loans extended within the group of the own bank, transactions with related party, derivative transactions within the own group and risk limits are the main surveillance call reports which are used for reviewing aggregate exposures to the group of the own bank. Names of all real and legal persons in their own risk group and related party risk limits are the main surveillance call reports for financial holding companies. In order to complement consolidated reports and analysis, BRSA also requests balance sheet, income statement, loan book details (including non-performing loans), securities, derivatives, FX position, transactions between cross-border establishments and the banking group, capital adequacy, transactions with financial sector and deposits data on a quarterly basis from the foreign based subsidiaries and off shore branches of the banks. Banks are also required to submit a number of periodic reports containing information of their parent companies, including balance sheet, shareholders list and income statements. The BRSA updated its on-site supervision process in 2012 and all banks have been examined with respect to the new process since then. As described in CP 8, BRSA teams take into account the consolidated risk profile of banks. Supervision manuals (SMIRASP and SMGAR) explicitly ask supervisory teams to understand the structure of the banking group to which the bank belongs. Also, the ownership structure of the bank is included in inspection reports together with the other findings. In this context, the adequacy of their risk management, internal control and internal audit systems, effectiveness of their internal processes and procedures and the compliance of their operations with the relevant legislation are assessed, on a group level, by the on-site examiners through the CAMELS rating system. Contagion and reputation risks, for instance, are taken into account with specific questions that need to be answered by the supervisor. There are also assessment criteria to address the risks that may arise from banks’ parent companies, affiliates and subsidiaries. Furthermore, banks are required to prepare their ICAAP reports on consolidated basis according to RICAAP article 46(1). In the article 47of RICAAP, it is stated that ICAAP reports comprise all the risks of the bank on consolidated basis. According to article 61 of RICAAP, banks should not abide by the definition and scope of consolidation specified in the legislation and the assessment should be made based on the partnership’s risk profile, rather than the inclusion of the partnership to the definition of consolidation specified in the legislation. Furthermore, section 5 of Annex to Guideline on ICAAP Report (GICAAPR), states that “In identifying their own risks, banks should also consider risks arising from the parent company or subsidiaries belonging to the parent company (for example, reputational risk), alongside the risks existing by themselves or arising from their consolidated affiliates and subsidiaries. In doing so, they should be attentive that there are no inconsistencies between the identification of risk and measurement and management activities”. As discussed in CPs 8 and 9, in practice, CAMELS rating assessments do not provide an appropriate framework for the deep analysis of issues and the ICAAP process is still on a learning phase for both banks and supervisors. That limits the ability of supervisors to fully understand the overall structure and group-wide risks of the conglomerates. In Turkey, as of September 2015, 19 banks have established foreign operations which include 60 subsidiaries. Total assets of these cross border operations amounts to 15.7% of the total assets of banking sector. In terms of total assets, the largest foreign establishments are located in Malta, Bahrain and the Netherlands whereas the highest number of branches and subsidiaries operate in the Turkish Republic of Northern Cyprus. | |||||||||||||||||||||
| EC2 | The supervisor imposes prudential standards and collects and analyses financial and other information on a consolidated basis for the banking group, covering areas such as capital adequacy, liquidity, large exposures, and exposures to related parties, lending limits and group structure. | |||||||||||||||||||||
| Description and findings re EC2 | Based on article 43 of the BL, prudential limits covering capital adequacy, liquidity, large exposures, exposures to related parties and lending limits are required to be met on both solo and consolidated basis. As explained in EC1, the BRSA collects and analyses data for monitoring the prudential limits and assess risks on a consolidated basis. Prudential consolidated ratios such as, capital adequacy, liquidity coverage ratio, lending limits, group risks, large and related party exposures, leverage ratio and FX net position are received from the banks on specified intervals. Banks are also required to submit to the BRSA quarterly consolidated financial statements such as balance sheet, income statement, cash flow statement, share-holders equity statement and earnings distribution tables. Issues associated with group structure are analyzed using monthly call reports and information collected during on-site inspections. | |||||||||||||||||||||
| EC3 | The supervisor reviews whether the oversight of a bank’s foreign operations by management (of the parent bank or head office and, where relevant, the holding company) is adequate having regard to their risk profile and systemic importance and there is no hindrance in host countries for the parent bank to have access to all the material information from their foreign branches and subsidiaries. The supervisor also determines that banks’ policies and processes require the local management of any cross-border operations to have the necessary expertise to manage those operations in a safe and sound manner, and in compliance with supervisory and regulatory requirements. The home supervisor takes into account the effectiveness of supervision conducted in the host countries in which its banks have material operations. | |||||||||||||||||||||
| Description and findings re EC3 | As explained in CP 7, banks’ cross border investments requires BRSA approval according to the BL Article 14 and RTSPIO Article 9. The BL also establishes that there should be no obstacles in gathering information and executing supervision on the cross border company and where necessary, the BRSA may require a MoU with the host supervisory authority. Therefore, BRSA has authority to reject any cross-border investment proposal either in the form of branch or subsidiary if the supervisory framework of the host country is deemed insufficient or does not allow appropriate access for supervision purposes. BRSA regulation requires banks to build an appropriate risk management framework that comprise the whole banking conglomerate. In particular, the ICAAP report should consider risk management practices in subsidiaries and the CAMELS rating system should evaluate the adequacy and effectiveness of management’s oversight of bank’s foreign operations. Furthermore, banks should inform the BRSA who are the board members of foreign subsidiaries and the BRSA that might reject them if consider that they do not hold the appropriate conditions for their functions. The BRSA also conducts on-site inspections in foreign branches and subsidiaries of banks once every two or three years. The effectiveness of the parent company’s oversight on the foreign operations is evaluated during these visits. Finally, there are specific reports submitted by banks on cross-border operations. The Cross Border Organizations Reporting Set, please refer to CP9, is the main source of information about the oversight of banks’ foreign operations. The reports include detailed information about operations of foreign establishments of banks. | |||||||||||||||||||||
| EC4 | The home supervisor visits the foreign offices periodically, the location and frequency being determined by the risk profile and systemic importance of the foreign operation. The supervisor meets the host supervisors during these visits. The supervisor has a policy for assessing whether it needs to conduct on-site examinations of a bank’s foreign operations, or require additional reporting, and has the power and resources to take those steps as and when appropriate. | |||||||||||||||||||||
| Description and findings re EC4 | BRSA has the power to initiate and carry out on-site inspections of foreign subsidiaries and branches of banks licensed in Turkey. On-site examiners of the BRSA perform periodic inspections in subsidiaries and branches overseas. The BRSA determines the list of the subsidiaries and branches which will be subject to on-site inspection mainly according to size and complexity of the operations. The frequency and timing of on-site inspections of foreign establishments also depend on work load of on-site examiners and host country supervisory authority’s time preferences. The issue is considered by the head of departments every year during the strategic planning phase of the supervisory cycle. The BRSA conducted 52 on-site visits to foreign subsidiaries and branches since 2008. These visits include 19 subsidiaries, 6 off-shore branches and 27 on-shore branches of 11 banks. The last time a large number of banks were visited was in 2013. Besides, upon the invitation from the host authorities, the BRSA on-site inspection teams have been involved in on-site inspection of subsidiaries of banks in a few jurisdictions during the last two years. The BRSA has entered into MoUs with the supervisory authorities of 34 countries to facilitate on-site inspections of foreign establishments of banks operating in Turkey. Among the 34 MoUs concluded by the BRSA, 19 MoUs are signed with the supervisory authorities of countries where Turkish banks have presence. These foreign operations represent 77% of total assets of the Turkish banks operating abroad. Additional MoUs are under discussion with foreign supervisory authorities. Article 98 of the BL also authorizes the BRSA to cooperate with a foreign supervisory authority even in the absence of an MoU. In this case, the requests of authorities of foreign countries regarding the audit of Turkey branches or undertakings of institutions operating in the financial markets of their own countries and to obtain information about such branches and undertakings, and the requests of information covered by consolidation from the overseas branches and undertakings of banks shall be subject to BRSB’s approval within the framework of the principle of reciprocity. Please also refer to CP13, EC2. | |||||||||||||||||||||
| EC5 | The supervisor reviews the main activities of parent companies, and of companies affiliated with the parent companies, that have a material impact on the safety and soundness of the bank and the banking group, and takes appropriate supervisory action. | |||||||||||||||||||||
| Description and findings re EC5 | The activities of parent companies are mostly assessed through the ratings process. The methodology has a number of assessment criteria that are analyzed by on-site supervisors. Nevertheless, as discussed in CP8, the methodology is not designed to provide an in-depth evaluation of all the criteria. The BRSA also requires banks to prepare reports on intra-group transactions on a yearly basis since 2014. Intra-group transaction reports include: - Transactions between the bank and its financial and non-financial subsidiaries (controlled directly or indirectly by the bank) - Transactions between the bank’s financial and non-financial subsidiaries (controlled directly by the bank) - Transactions between parent company and the bank together with its financial subsidiaries (controlled directly or indirectly by the bank) - Transactions between the bank with its financial subsidiaries and companies controlled directly or indirectly by parent company. The transactions include financial (securities, loans and participation investments) and non-financial transactions (trading, property related transactions, leasing, technical services, consulting services etc.). Information on intra-group transaction reports is an input for BRSA examiners in the rating process. | |||||||||||||||||||||
| EC6 | The supervisor limits the range of activities the consolidated group may conduct and the locations in which activities can be conducted (including the closing of foreign offices) if it determines that:
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| Description and findings re EC6 | As explained in CP 1, article 67 of the BL allows the BRSA to impose restrictive measures on banks in a number of situations that include impediments to supervision and inadequate risk management. Among these restrictive measures, article 70 of the BL authorizes the BRSA to require the bank to restrict or temporarily suspend its activities, as inclusive of all the organization of the relevant activity, or the domestic or overseas branches to be deemed necessary or the relations with correspondent banks. Furthermore, according to article 78 of BL, financial holding companies are also subject to article 70. Therefore, if a bank or a financial holding company is a parent company of a bank or part of a banking group, BRSA has power to restrict or temporarily suspend their activities. | |||||||||||||||||||||
| EC7 | In addition to supervising on a consolidated basis, the responsible supervisor supervises individual banks in the group. The responsible supervisor supervises each bank on a standalone basis and understands its relationship with other members of the group.29 | |||||||||||||||||||||
| Description and findings re EC7 | According to article 95 of BL, BRSA is responsible for the supervision of institutions under the scope of the law both on a consolidated and individual basis. The supervisory perspective of the BRSA analyses individual banks and risks that other entities of the group might impose on them. The BL and all the other applicable regulations put the individual banks (the statement “bank”) at the center of the regulatory and supervisory framework. As explained on CPs 8 and 9, data is also collected and analyzed on individual basis and the impact of the individual bank’s relationships with the other members of the group on the safety, soundness and reputation of the bank is assessed in the context of the rating process and off-site reports such as the intra-group transactions report. | |||||||||||||||||||||
| Additional criteria | ||||||||||||||||||||||
| AC1 | For countries which allow corporate ownership of banks, the supervisor has the power to establish and enforce fit and proper standards for owners and senior management of parent companies. | |||||||||||||||||||||
| Description and findings re AC1 | ||||||||||||||||||||||
| Assessment of Principle 12 | Largely Compliant | |||||||||||||||||||||
| Comments | The regulatory and reporting framework provides a broadly appropriate structure for monitoring and assessing risks to banks from non-banking and foreign banking operations in banking groups. However, the current limitations of the CAMELS rating and ICAAP process, the BRSA should make further effort to monitor and manage risks arising from nonbanking and foreign activities or parent entities of a financial group. In this regard, as described in CP 8 and 9, the BRSA should deepen the analyses and strengthen its techniques, such as group-wide stress testing, to monitor and assess these risks. It is important to improve further the group-wide strategic view of the banking group operations and risks. Authorities should further improve the recovery and resolution planning of large banking groups particularly once the necessary power is given to the supervisor by the expected new legislation. Such planning should also consider scenarios where shocks originate from non-banking entities or parent groups. Taking into account that these shortcomings have already been reflected in other principles, particularly CP 8 and 9, the assessors considered this principle compliant. | |||||||||||||||||||||
| Principle 13 | Home-host relationships. Home and host supervisors of cross-border banking groups share information and cooperate for effective supervision of the group and group entities, and effective handling of crisis situations. Supervisors require the local operations of foreign banks to be conducted to the same standards as those required of domestic banks. | |||||||||||||||||||||
| Essential criteria | ||||||||||||||||||||||
| EC1 | The home supervisor establishes bank-specific supervisory colleges for banking groups with material cross-border operations to enhance its effective oversight, taking into account the risk profile and systemic importance of the banking group and the corresponding needs of its supervisors. In its broadest sense, the host supervisor who has a relevant subsidiary or a significant branch in its jurisdiction and who, therefore, has a shared interest in the effective supervisory oversight of the banking group, is included in the college. The structure of the college reflects the nature of the banking group and the needs of its supervisors. | |||||||||||||||||||||
| Description and findings re EC1 | As of September 2015, 19 Turkish banks had foreign subsidiaries or branches operating in 28 different countries. At least 5 of these have more than 15% of their assets abroad and at least two of them have more than 40%. The BRSA has organized early this year a supervisory college for one of the largest Turkish banks that maintain substantial operations abroad. The college was the first one organized by the BRSA in its capacity as home supervisor. Host authorities from the 6 countries where the bank maintains operations were invited. Representatives of the BRSA presented information on the current situation of the banking sector of Turkey and the BRSA’s approaches to banking regulation and supervision. There was also exchange of information among home and host supervisors about the operations, strength and weakness of the particular bank. Host and home supervisors considered the event important for the consolidated supervision of the bank. There are other banks in Turkey with extensive operations abroad that would benefit from colleges. The BRSA explained that it plans to organize other colleges in the future. | |||||||||||||||||||||
| EC2 | Home and host supervisors share appropriate information on a timely basis in line with their respective roles and responsibilities, both bilaterally and through colleges. This includes information both on the material risks and risk management practices of the banking group30 and on the supervisors’ assessments of the safety and soundness of the relevant entity under their jurisdiction. Informal or formal arrangements (such as memoranda of understanding) are in place to enable the exchange of confidential information. | |||||||||||||||||||||
| Description and findings re EC2 | According to the article 98 of the BL, the BRSA is authorized to cooperate and exchange information about financial institutions and financial markets with competent supervisory authorities, within the framework of bilateral memoranda of understanding or through other means, in order to conduct inspections in foreign countries, provide training and ensure exchange of personnel with the purpose of the harmonization of policies and legislation. The MoUs signed by the BRSA specify general principles and procedures concerning the cooperation within the statutory legislation. They contain provisions about the exchange of information that includes providing relevant information to the counterparty authority regarding: i) material developments or supervisory concerns in respect of cross-border establishments; ii) events which have the potential to endanger the stability of the cross-border establishments; iii) material enforcement actions taken against the cross-border establishment; and iv) cases of revocation of the license and operating permission or voluntary liquidation. The BRSA has entered into MoU with the supervisory authorities of 34 countries. Among the 34 MoUs concluded by the BRSA, 19 MoUs are signed with the supervisory authorities of countries where Turkish banks have presence. These foreign subsidiaries hold 77% of total assets of the Turkish banks operating abroad. Besides, MoU negotiations are continuing with six countries other countries where Turkish banks are operating. Difficulties that occurred in the past for supervision in a specific country have been overcome. The BRSA explained that currently the agency does not face any problems to supervise cross border subsidiaries or exchange information with home supervisors. Furthermore, the BRSA is legally authorized to cooperate with a foreign supervisory authority even in the absence of a specific agreement. Pursuant to Article 98 of the BL, if a MoU is not effective, the requests of authorities of foreign countries, which have been authorized for supervision pursuant to their respective laws and which are equivalent to the BRSA, to examine the Turkish branches or undertakings of institutions operating in the financial markets of their own countries and to obtain information about such branches and undertakings, and the requests of information covered by consolidation from the overseas branches and undertakings of banks shall be fulfilled within the framework of the principle of reciprocity and is subject to the permission of the BRSB. Finally, as a host supervisor of 32 banks the BRSA has participated in supervisory colleges arranged by several countries and organized a college for one of Turkish banks with one of the largest operations abroad. | |||||||||||||||||||||
| EC3 | Home and host supervisors coordinate and plan supervisory activities or undertake collaborative work if common areas of interest are identified in order to improve the effectiveness and efficiency of supervision of cross-border banking groups. | |||||||||||||||||||||
| Description and findings re EC3 | As explained in EC1 and EC2 the BRSA maintains MoUs with other relevant supervisory authorities and participates in supervisory colleges. In order to improve the efficiency of the consolidated supervision, the BRSA has conducted on-site inspections of foreign subsidiaries and branches of Turkish banks operating in a number of countries. Additionally, upon the invitation from host authorities, the BRSA on-site inspection teams have participated in inspections of Turkish banks operating abroad. The BRSA provides feedback to the host authority on the issues found by the examiners during the on-site inspection of the cross border establishment providing a summary of the inspection report. In the case of on-site visits, communication is updated through opening and closing meetings held between the BRSA examiners and the host supervisory authority. The BRSA also approves meeting requests of equivalent supervisory authorities concerning the cross border establishments operating in Turkey. Similarly, the BRSA organizes meetings with the auditors of foreign supervisory authorities who perform on-site visit to the Turkish subsidiaries of foreign banks. Any findings that might have an impact on the safety and soundness or the risk management capabilities of the banking group are also shared with the relevant host authority within the scope of MoUs concluded. The BRSA also explained that it exchanges appropriate information with foreign supervisory authorities in line with the provisions of the BL regarding the financial situation of banks, process of mergers, disintegrations and change of shares, qualifications of managers, material risks, safety and soundness of relevant entity. | |||||||||||||||||||||
| EC4 | The home supervisor develops an agreed communication strategy with the relevant host supervisors. The scope and nature of the strategy reflects the risk profile and systemic importance of the cross-border operations of the bank or banking group. Home and host supervisors also agree on the communication of views and outcomes of joint activities and college meetings to banks, where appropriate, to ensure consistency of messages on group-wide issues. | |||||||||||||||||||||
| Description and findings re EC4 | As mentioned above, the BRSA is empowered to exchange information with other relevant supervisors and maintain a number of MoU setting the principles for the communication. Colleges and on-site inspections are also part of the strategy. | |||||||||||||||||||||
| EC5 | Where appropriate, due to the bank’s risk profile and systemic importance, the home supervisor, working with its national resolution authorities, develops a framework for cross-border crisis cooperation and coordination among the relevant home and host authorities. The relevant authorities share information on crisis preparations from an early stage in a way that does not materially compromise the prospect of a successful resolution and subject to the application of rules on confidentiality. | |||||||||||||||||||||
| Description and findings re EC5 | Since Turkey is not a home country or a key-host country for G-SIBs, the BRSA and SDIF, although available, have not been participating in crisis management groups of these institutions. Turkish supervisory authorities have not initiated the development of a framework for cross-border crisis cooperation and coordination. As mentioned in EC1, some Turkish banks present material cross border operations and could benefit from such framework. | |||||||||||||||||||||
| EC6 | Where appropriate, due to the bank’s risk profile and systemic importance, the home supervisor, working with its national resolution authorities and relevant host authorities, develops a group resolution plan. The relevant authorities share any information necessary for the development and maintenance of a credible resolution plan. Supervisors also alert and consult relevant authorities and supervisors (both home and host) promptly when taking any recovery and resolution measures. | |||||||||||||||||||||
| Description and findings re EC6 | As mentioned in CP 8, Turkish supervisory authorities have not initiated the development of group resolution plans. The BRSA and the SDIF have established a joint working group to analyze the eventual need to change the current resolution regime and align it with FSB’s Key Attributes of Effective Resolution Regimes. The joint working group is still formulating policy proposals and necessary legislative amendments. Banks have not been required yet to develop recovery plans and supervisors do not assess the resolvability of banking groups. | |||||||||||||||||||||
| EC7 | The host supervisor’s national laws or regulations require that the cross-border operations of foreign banks are subject to prudential, inspection and regulatory reporting requirements similar to those for domestic banks. | |||||||||||||||||||||
| Description and findings re EC7 | Pursuant to the legislation, subsidiaries or branches of foreign banks operating in Turkey are subject to the same prudential, supervisory and regulatory reporting requirements applied to domestic banks. | |||||||||||||||||||||
| EC8 | The home supervisor is given on-site access to local offices and subsidiaries of a banking group in order to facilitate their assessment of the group’s safety and soundness and compliance with customer due diligence requirements. The home supervisor informs host supervisors of intended visits to local offices and subsidiaries of banking groups. | |||||||||||||||||||||
| Description and findings re EC8 | According to the Article 98 of the BL, foreign authorities which have been authorized for supervision under their respective laws and which are equivalent to the BRSA, need to request permission to examine the Turkish branches or undertakings of institutions operating in the financial markets of their own countries. These permissions and requests of information covered by consolidation from the overseas branches and undertakings of banks are fulfilled within the principle of reciprocity and are subject to the permission of the BRSB. In this context, home supervisors may carry out on-site examination in Turkey subject to prior notification to the BRSA. If there is a MoU in place, the request regarding the on-site inspection is evaluated considering the provisions of the MoU. If there is not a MoU, the on-site visit request is submitted to the BRSB for approval. The BRSA explained that all the inspection requests of home supervisory authorities of foreign banks operating in Turkey have been accepted by the BRSA. A number of jurisdictions have performed on site visits to cross border establishments of financial institutions operating in the financial markets of their own countries. As mentioned in EC 3, overseas subsidiaries and branches of Turkish banks are also subject to on-site inspection. BRSA has conducted 39 on-site visits to foreign subsidiaries and branches of banks operating in Turkey since 2011. These visits include 20 subsidiaries and 16 branches operating in 13 countries. | |||||||||||||||||||||
| EC9 | The host supervisor supervises booking offices in a manner consistent with internationally agreed standards. The supervisor does not permit shell banks or the continued operation of shell banks. | |||||||||||||||||||||
| Description and findings re EC9 | The BRSA does not permit shell banks or booking offices. Furthermore, Article 6 (4) of the BL stipulates that representative offices of the foreign banks are not allowed to do any banking business. CAROT regulates the activities of representative offices of foreign banks. | |||||||||||||||||||||
| EC10 | A supervisor that takes consequential action on the basis of information received from another supervisor consults with that supervisor, to the extent possible, before taking such action. | |||||||||||||||||||||
| Description and findings re EC10 | As explained in EC1, 2 and 3 above, the BRSA works in contact with other supervisors through various channels. MoUs signed by the BRSA includes provisions that authorities should inform each other of any material developments and formal enforcement action taken against cross-border establishments. Even in the absence of MoU with foreign authorities, the BRSA may consult with the other supervisory authorities. | |||||||||||||||||||||
| Assessment of Principle 13 | Largely Compliant | |||||||||||||||||||||
| Comments | The BRSA has made vast efforts to improve home-host relationship during the last few years. Among several initiatives the agency has started organizing colleges, signed a number of important MoUs and removed obstacles that weakened the supervision of Turkish banks operations in several countries. Nevertheless, considering that some Turkish banks hold material operations abroad, it is important to improve the relationship even further. In particular, it is essential to develop a framework for cross-border crisis coordination with relevant host authorities and the development of resolution plans that pay special attention to cross border issues. | |||||||||||||||||||||
| Principle 1 | Responsibilities, objectives and powers. An effective system of banking supervision has clear responsibilities and objectives for each authority involved in the supervision of banks and banking groups.3 A suitable legal framework for banking supervision is in place to provide each responsible authority with the necessary legal powers to authorize banks, conduct ongoing supervision, address compliance with laws and undertake timely corrective actions to address safety and soundness concerns.4 | |||||||||||||||||||||
| Essential criteria | ||||||||||||||||||||||
| EC1 | The responsibilities and objectives of each of the authorities involved in banking supervision5 are clearly defined in legislation and publicly disclosed. Where more than one authority is responsible for supervising the banking system, a credible and publicly available framework is in place to avoid regulatory and supervisory gaps. | |||||||||||||||||||||
| Description and findings re EC1 | The Banking Law No. 5411 (BL) establishes the BRSA as being responsible for the supervision and regulation of the banking industry as well as financial leasing, factoring and consumer financing companies in Turkey. The other authorities that have a role in the regulation and supervision of the financial system are:
Responsibilities of each entity are well established with small room for overlap or regulatory gap. | |||||||||||||||||||||
| EC 2 | The primary objective of banking supervision is to promote the safety and soundness of banks and the banking system. If the banking supervisor is assigned broader responsibilities, these are subordinate to the primary objective and do not conflict with it. | |||||||||||||||||||||
| Description and findings re EC2 | Article 93 of the BL establishes that the BRSA is responsible “for the establishment of confidence and stability in financial markets, the sound operation of the credit system, the development of the financial sector and the protection of the rights and interests of depositors”. The BL also obligates the BRSA “to prevent any transaction and practice that could endanger the rights of the depositors and the sound and safe operation of banks and severely damage the economy; and to take and implement the decisions and measures in order to ensure the efficient operation of the credit system”. The concept of “sound operation of the credit system” is not further developed. Nevertheless, considering the role of the BRSA in the development of the financial sector, article 94 of the BL states that the BRSA should ensure the profitable, efficient and rational operation of banks; ensure competitiveness of the financial system; closely following up the status of international banks in terms of supervision; ensure the integration of professional in the financial market; and prepare the regulations pertaining to financial markets. The BL does not distinguish among the objectives and seems to assign the same hierarchy to the financial stability and development of the financial sector objectives. The assessors noted that some BRSA decisions (e.g., loan loss provisions for some products, loan restructuring rules) might be interpreted as rules that aim primarily to support financial development objectives, despite the fact that the BRSA considers that some of them are within the scope of macroprudential policy. | |||||||||||||||||||||
| EC3 | Laws and regulations provide a framework for the supervisor to set and enforce minimum prudential standards for banks and banking groups. The supervisor has the power to increase the prudential requirements for individual banks and banking groups based on their risk profile6 and systemic importance.7 | |||||||||||||||||||||
| Description and findings re EC3 | The BL empowers BRSA to set and enforce minimum prudential standards. The BL (art. 43) also states that the Board is authorized to set more cautious different minimum or maximum standard ratios or limits from those set for each bank or banking groups or to change the calculation and reporting periods, or to set ratios or limits that have not been set in general terms. This provision is applicable both on a consolidated and non-consolidated basis. Please refer to CP16 for example of practical application of these powers. According to article 7 of Regulation On The Procedures And Principles For The Audit To Be Made By The Banking Regulation And Supervision Agency (RAA) and also the RICAAP the Board of BRSA has the power to publish guidelines to inform on best practices expected from banks and on the evaluation criteria that will be considered on examinations carried out by the agency. These guidelines follow the principle of proportionality in the sense that banks are expected to implement the principles according to the banks’ own scales, risk profiles, activities, volume, nature and complexity of their business and transactions. | |||||||||||||||||||||
| EC4 | Banking laws, regulations and prudential standards are updated as necessary to ensure that they remain effective and relevant to changing industry and regulatory practices. These are subject to public consultation, as appropriate. | |||||||||||||||||||||
| Description and findings re EC4 | The BL was established in 2005 and has been updated several times. The BRSA is authorized to issue regulations and communiqués through Board decisions to ensure that all rules and regulations remain effective and relevant to changing industry and regulatory practices. The agency has done so frequently to implement international standards, including Basel II/III, and update the regulation appropriately. According to the BL, the drafts of the secondary legislation (regulation and communiqués) prepared by the BRSA need to be made public for a minimum seven days consultation period to inform the public opinion and collect suggestions. In practice the period is usually longer. | |||||||||||||||||||||
| EC5 | The supervisor has the power to:
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| Description and findings re EC5 | On access to banks, the BL (art. 43, 93, 95) empowers the BRSA to have access to banks and banking group’s information for supervisory purposes. Banks are required to provide the BRSA, timely and properly, any consolidated and non-consolidated information, document, report or financial statements. The documents should be consistent with their accounts and record keeping systems, within the framework set forth by the BRSB. BRSA supervisors also have access to the staff of the banks including the board of directors. On review the overall activities of the banking group, reporting and supervision requirements prescribed in the regulations covers consolidated activities of banks, including their cross-border activities. According to article 96 of the BL, the regulated institutions and their shareholders and subsidiaries shall provide the BRSA with any information and document, including those classified as confidential, if requested by the BRSA. The requirements include parent banks as well as their domestic and foreign subsidiaries, their jointly-controlled undertakings, their branches and representative offices. On the supervision of foreign banks, Turkish banking legislation, does not separate regulatory and supervisory framework according to ownership. In this context, foreign banks established and operating in Turkey are subject to the same prudential, supervisory and regulatory rules applied to domestic banks. | |||||||||||||||||||||
| EC6 | When, in a supervisor’s judgment, a bank is not complying with laws or regulations, or it is or is likely to be engaging in unsafe or unsound practices or actions that have the potential to jeopardize the bank or the banking system, the supervisor has the power to:
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| Description and findings re EC6 | The BL provides the BRSA a broad range of tools that can be applied according to the severity of the situation. The definitions of situations when corrective actions can be taken allow for timely supervisory action. Actions that could be taken include revoking the bank’s license and triggering resolution. There are protocols that allow supervisors to coordinate with resolution authorities. Article 67 of the BL establishes that remedial action shall be taken against a bank when:
When the bank fails to implement the determined corrective measures the agency may require the bank’s board of directors to take and promptly implement any measure, including the following:
In addition, according to protocol signed between the BRSA and the SDIF, the BRSA notifies the SDIF that a bank has been required to take corrective, rehabilitative, or restrictive measures (Articles 68, 69, and 70). The timely notification allows SDIF to develop a Resolution Action Plan. Please also refer to CP3. Please also refer to CP11 for additional discussion on the use of these powers in practice. | |||||||||||||||||||||
| EC7 | The supervisor has the power to review the activities of parent companies and of companies affiliated with parent companies to determine their impact on the safety and soundness of the bank and the banking group. | |||||||||||||||||||||
| Description and findings re EC7 | The BL provides powers for the BRSA to supervise both banks and controlling parents of the bank. Supervision is performed on a consolidated and non-consolidated basis. Article 96 of the BL includes among those obligated to provide information the shareholders of the banks and banking groups therefore including parent companies. | |||||||||||||||||||||
| Assessment of Principle 1 | Largely Compliant. | |||||||||||||||||||||
| Comments | The BL provides a broadly appropriate framework for regulating and supervising banks. It also provides clear responsibilities and adequate powers to the BRSA. However, the lack of appropriately defined hierarchy among the objectives of financial stability and development of the financial sector may cause potential conflicts and be harmful to the safety and soundness of banks. The assessors noted that some BRSA decisions (e.g., differentiations in loan loss provisions and loan restructuring rules) might be interpreted as rules that aim primarily to support financial development objectives. Such measures might hinder the reputation of the supervisors and convey the message of forbearance. In order to be fully compliant with this principle the objective of development of the financial sector should be explicitly subordinated to financial stability in the BL. | |||||||||||||||||||||
| Principle 2 | Independence, accountability, resourcing and legal protection for supervisors. The supervisor possesses operational independence, transparent processes, sound governance, budgetary processes that do not undermine autonomy and adequate resources, and is accountable for the discharge of its duties and use of its resources. The legal framework for banking supervision includes legal protection for the supervisor. | |||||||||||||||||||||
| Essential criteria | ||||||||||||||||||||||
| EC1 | The operational independence, accountability and governance of the supervisor are prescribed in legislation and publicly disclosed. There is no government or industry interference that compromises the operational independence of the supervisor. The supervisor has full discretion to take any supervisory actions or decisions on banks and banking groups under its supervision. | |||||||||||||||||||||
| Description and findings re EC1 | Article 82 of the BL explicitly states that the BRSA: - has been established as a public legal person with administrative and financial autonomy; - shall independently perform and use the regulatory and supervisory duties and rights assigned thereto by the BL and the applicable legislation, under its own responsibility; − shall independently use the financial resources allocated thereto within the framework of the related laws, to the extent its duties and powers necessitate within the framework of the principles and procedures set out in its own budget; - shall employ adequate number of personnel with required qualifications in order to efficiently fulfill its duties and powers. However, the BL also establishes a few provisions that might undermine independence in practice. Article 93 requires the BRSA to consult the related Ministry (Deputy Prime Minister), before putting into force regulatory procedures other than internal regulations, in order to check the harmony with the sector strategy and policies. Furthermore, the BL also allows the relevant ministry to challenge BRSA’s regulatory decisions, allowing it to file a lawsuit for the cancelation of the BRSA Boards’ regulatory decisions (art. 105). The BRSA has informed the assessors that there is a draft amendment to the BL proposing the revocation of article 105. On accountability and governance, the BRSA must brief the Council of Ministers regarding its policies every six months. The Agency must also inform the Plans and Budget Commission of the Turkish Grand National Assembly about its activities annually. The BL (art. 97) also determines the BRSA to publish quarterly reports regarding the developments in the financial sector as well as regular reports regarding the aggregated performance of the financial institutions. Nevertheless, the assessors did not see evidence of transparent scrutiny of the BRSA activities in relation to its goals and responsibilities, i.e., a third part aiming to ensure that the powers delegated to the BRSA are exercised appropriately and that its operations are effective and in line with its mandates and objectives. | |||||||||||||||||||||
| EC2 | The process for the appointment and removal of the head(s) of the supervisory authority and members of its governing body is transparent. The head(s) of the supervisory authority is (are) appointed for a minimum term and is removed from office during his/her term only for reasons specified in law or if (s)he is not physically or mentally capable of carrying out the role or has been found guilty of misconduct. The reason(s) for removal is publicly disclosed. | |||||||||||||||||||||
| Description and findings re EC2 | The governing body of the BRSA is the board (BRSB) whose seven members including one Chairman, (also the Chairman of the BRSA), and one Deputy Chairman (co-Chairman) who are appointed by the Council of Ministers. The BL (Art. 84) establishes requirements for appointment of the members of the Board. Board members should broadly meet the same conditions required for the founders of a private bank and, additionally, cannot hold shares of the entities related to the sectors which are under the regulatory and supervisory scope of the BRSA, engage in commerce, carry out stock exchange transactions or to be directors or members of the board of auditors of any company (Art. 86). Detailed obligations, prohibitions, incompatibilities, and liabilities are established in the Regulation on Principles of Professional Conduct to be Observed by the Members of the Banking Regulation and Supervision Board and by the Staff of the Banking Regulation and Supervision Agency, which binds the BRSB members and the BRSA employees by rules on impartiality, conflicts of interest, confidentiality, compatible activities outside the BRSA, acceptance of gifts as well as principles to be observed while leaving the BRSA. The chairman and/or members of the BRSB are appointed for a 5 years term that can be renewed once (BL, art. 85). The conditions for board members being removed from office are established in the BL and cover issues such as medical conditions or not being able to meet conditions for appointment. The removal depends upon approval of the Prime Minister, but the law does not require the disclosure of the reasons. | |||||||||||||||||||||
| EC3 | The supervisor publishes its objectives and is accountable through a transparent framework for the discharge of its duties in relation to those objectives.8 | |||||||||||||||||||||
| Description and findings re EC3 | According to Article 88 of the BL, the BRSB is responsible for determining the strategic plan, performance criteria, goals and objectives of the BRSA. The planning process comprises of the determination of the goals, objectives and methods of the institution including the human and financial resources. The resulting plan is published every three years. The accountability arrangements are established in the BL. The BRSA must prepare and submit an annual report of its activities to the Council of Ministers (art. 97). The report that covers goals, organizational structure, regulatory and supervisory activities and agency resources among other issues should be published in conjunction to its audit final accounts. The BRSA is also required to inform the Plans and Budget Commission of the Turkish Grand National Assembly about its activities once a year. As explained in EC1, the assessors did not see evidences of independent and transparent scrutiny of the BRSA activities. | |||||||||||||||||||||
| EC4 | The supervisor has effective internal governance and communication processes that enable supervisory decisions to be taken at a level appropriate to the significance of the issue and timely decisions to be taken in the case of an emergency. The governing body is structured to avoid any real or perceived conflicts of interest. | |||||||||||||||||||||
| Description and findings re EC4 | The BL establishes the BRSB as the decision-making organ of the BRSA. The Board main duties and powers are: - take corrective, rehabilitating and restrictive measures against banks; - revoke the operation permission of Banks; -prepare the secondary legislation in harmony with the international standards and principles regarding the sector or area which they are authorized to regulate and supervise and take decisions to this effect; - set the strategic plan, performance criteria, goals and objectives and service quality standards of the Agency; to establish the human resources and working policies; to provide suggestions regarding the Agency’s service units and their duties; - debate and decide on the proposed budget of the Agency that is prepared in tune with the Agency’s strategic plan and goals and objectives; The chairman, who is the top rank manager of the Agency, is responsible for administering and representing the Agency. The Chairman may assign some of his duties and powers, which are not related to the Board, to his subordinates, provided that the boundaries of such assignment are clearly put down in writing. In practice, important decisions such as granting or revoking a bank’s license, significant changes in a bank’s ownership structure and imposing severe measures to a bank are taken by the BRSA Board. The level of the decisions to be taken is determined in the BL and in sub regulations. Operationally, all supervisory findings that might demand an action by the BRSA are sent to the enforcement department which analyzes the available evidence and suggests an action to the Board or other competent body. Please refer to EC2 to information on conflict of interest. | |||||||||||||||||||||
| EC5 | The supervisor and its staff have credibility based on their professionalism and integrity. There are rules on how to avoid conflicts of interest and on the appropriate use of information obtained through work, with sanctions in place if these are not followed. | |||||||||||||||||||||
| Description and findings re EC5 | Board members and agency personnel are subject to regulation on Professional and Ethical Principles that aims to ensure professionalism and integrity. The principles provide, for example, rules regarding impartiality, conflicts of interest, confidentiality, compatible activities outside the BRSA, acceptance of gifts as well as principles to be observed while leaving the BRSA. Additionally, the BL states that the Board chairman and other personnel shall not disclose confidential information regarding the Agency to any person even if they leave the office. Also according to Article 92 professional staff cannot assume for at least two years any duty in a bank where they conducted on-site and off- site supervision process or practice during the past two years. Banks expressed their respect for the professionalism and integrity of the BRSA staff. | |||||||||||||||||||||
| EC6 | The supervisor has adequate resources for the conduct of effective supervision and oversight. It is financed in a manner that does not undermine its autonomy or operational independence. This includes:
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| Description and findings re EC6 | The expenses of the BRSA are financed from contributions paid by the supervised institutions. The amount collected as contribution cannot exceed three per ten thousand of the total assets of the institutions. Excess revenues of the Agency at the end of the financial year are transferred to the general budget. The ratio, decided by the BRSA board, is substantially below the limit, given the agency room for maneuvering. The BRSA staff on supervisory functions number grew from approximately 220 in 2013 to 265 in 2015 mainly due to the creation of the Department of Information Systems Compliance and the Department of Data and System management. Also refer to CP 9. BRSA personnel can be hired under contract or permanent position. Senior management, including Vice chairmen, department heads, directors, chairman’s advisors and the professional staff are employed under contracts signed for their positions. This arrangement exempts their remuneration from following the Civil Servants Law. Board Chairman shall be paid a monthly salary that is equal to the amount of financial and social rights paid to the Prime Ministry Undersecretary. The remuneration of Board members is equal to ninety-five percent of the Board Chairman. The salaries and other social and financial rights of the permanent contracted personnel of the Agency are determined by the Board, on the condition that they will not be more than the maximum amount indicated to the chairman. BRSA non contractual personnel follow the public sector salary scales. The salary level tends to be lower than the private sector especially for the middle and upper management levels. The average compensation at the entry level is higher than the private sector. The BRSB is empowered to hire new employees observed the limits fixed by the BL. The BL limits are reasonably higher than the current staff, allowing room for additional staff if the Agency consider necessary. Entry conditions are not attractive for mid-career professionals that provides practical constraints to the hiring of experienced staff. In practice new hires are mostly recently graduate professionals that are trained in the agency. The absence of an effective option to recruit mid-career staff might represent a challenge particularly if the agency loses a substantial number of experienced staff. The BRSA has a budget and a program for regular training of the staff. Records show a comprehensive number of trainings activities in terms of topics and number of participants that were developed domestically and abroad. Technology expenditures are made to keep the staff equipped with the tools needed to supervise the banking industry. BRSA has memberships at online learning environments, market data providers (Reuters, Bloomberg and etc.) and buys specialized hardware and software (about reporting systems, risk measurement tools etc.) to supervise the industry. The BRSA explained that the travel budget is adequate for their supervisory work and cooperation initiatives with other supervisors. As an example, it mentioned that BRSA staff represents BRSA in a number of committees and subgroups of the Financial Stability Board and the Basel Committee. The BRSA also claimed that adequate resources are allocated for the participation in supervisory colleges and on-site supervision of subsidiaries abroad. | |||||||||||||||||||||
| EC7 | As part of their annual resource planning exercise, over the short- and medium-term, taking into account relevant emerging supervisory practices. Supervisors review and implement measures to bridge any gaps in numbers and/or skill-sets identified. | |||||||||||||||||||||
| Description and findings re EC7 | BRSA board is responsible for defining the strategic plan for the agency. The plan sets three years goals and objectives and discusses the availability of human and financial resources. Training needs to bridge gaps are assessed annually during the development of the BRSA Annual Training Plan. The process collects training needs from the different departments and proposes events to address them. The plan is discussed with the Human Resources Committee and the Chairman. When additional human resources are considered necessary, head of departments make a request to the Human Resources Committee. After an evaluation, the final decision for hiring new personnel is made by the chairmanship. | |||||||||||||||||||||
| EC8 | In determining supervisory programs and allocating resources, supervisors take into account the risk profile and systemic importance of individual banks and banking groups, and the different mitigation approaches available. | |||||||||||||||||||||
| Description and findings re EC8 | The BRSA determines its supervisory plan with a dynamic risk focus approach. Resources are allocated mainly based on the sector share of bank’s total risk (Credit, Market and Operational) and the bank’s rating determined by the supervisory team. A larger amount of resources are allocate to more risky and systemic important banks. See detailed discussion in CP8. The supervisory plan is continuously revised, which may change the allocation of resources during the year. These are discussed constantly between the frontline analyst teams and the BRSA’s senior management. | |||||||||||||||||||||
| EC9 | Laws provide protection to the supervisor and its staff against lawsuits for actions taken and/or omissions made while discharging their duties in good faith. The supervisor and its staff are adequately protected against the costs of defending their actions and/or omissions made while discharging their duties in good faith. | |||||||||||||||||||||
| Description and findings re EC9 | The BL provides legal protection for the supervisors. Article 104 estates that lawsuits against the Chairman, Board members and staff for actions taken in good faith in the exercise of their responsibilities are subject to the permission of relevant Minister for the Chairman and Board members and the permission of the Chairman for the Agency staff. The law also establishes that for the initiation of any investigation of offenses alleged to have been committed by the chairman, Board members and Agency personnel in connection with their duties there must be a clear and solid evidence indicating that such members or personnel have acted for acquiring interests for themselves or third persons and for causing damages on the Agency or third persons and have acquired interests for themselves or third persons and caused damages as a result of their acts. The law also establishes a framework to protect staff from the costs of litigation connected to their duties in the BRSA even if they have left office. The legal fees for such lawsuits as well as the attorney’s fees are financed from the budget of the Agency. Finally, the law provides protection against legal action for compensation of damages, payment of receivables and executive proceedings. As long as the action is connected with the duties of the Agency, both during and after the staff terms in office, the legal action should be considered to have been taken against the Agency. There were no civil law cases against officers and managers of the BRSA within the scope of this provision in the last five years. | |||||||||||||||||||||
| Assessment of Principle 2 | Materially Non-compliant | |||||||||||||||||||||
| Comments | The legal protection of the supervisor is broadly adequate. Nonetheless the institutional framework contains shortcomings that should be improved. The BL establishes the BRSA as an independent body but it contains provisions that might undermine independence in practice. There are several channels of interaction between the BRSA and the government that, considered together, may accommodate political influence: i) the appointments of the Chair and Board members are made by the Council of Ministers without any confirmation process by other independent body; ii) before putting into force regulatory procedures the BRSA needs, by law, to consult the related Ministry; iii) the Prime Minister can approve the removal, if the conditions specified in the BL are met, of members of the Board without publishing the reasons; iv) the relevant minister may permit lawsuit against board members; and v) the BL allows the relevant ministry to file a lawsuit for the cancelation of the Boards regulatory decisions (art. 105). These possible channels of political influence over the Agency, particularly considering the large role played by state owned banks in Turkey, might cause conflicts of interests that might undermine financial stability. The authorities should therefore review the legislation to limit the cases that require the Minister’s involvement. In particular, it seems appropriate to establish a third party to perform a stronger role in the checks and balances framework such as, making regulatory consultation procedures more transparent, so that BRSA proposals and Ministry comments are published, introducing a process for appointments for the BRSB to be confirmed by a nonexecutive government body and removing the related minister permission for lawsuits for the cancelation of the BRSB regulatory decisions. There also seems to be room for improving the accountability framework. Despite the periodic briefings from the BRSA to the Council of Ministers, the assessors could not see evidence of a third part aiming to ensure that the powers delegated to the BRSA are exercised appropriately and that its operations are effective and in line with its mandate and objectives. Finally, in relation to resourcing, entry conditions to the BRSA are not attractive for the hiring of mid-career professionals and provide practical constraints in the event of a shortfall in experience levels. | |||||||||||||||||||||
| Principle 3 | Cooperation and collaboration. Laws, regulations or other arrangements provide a framework for cooperation and collaboration with relevant domestic authorities and foreign supervisors. These arrangements reflect the need to protect confidential information.9 | |||||||||||||||||||||
| Essential criteria | ||||||||||||||||||||||
| EC1 | Arrangements, formal or informal, are in place for cooperation, including analysis and sharing of information, and undertaking collaborative work, with all domestic authorities with responsibility for the safety and soundness of banks, other financial institutions and/or the stability of the financial system. There is evidence that these arrangements work in practice, where necessary. | |||||||||||||||||||||
| Description and findings re EC1 | There are several arrangements in place for cooperation between domestic authorities. The FSC composed of the Treasury and the heads of the CBRT, BRSA, CMB, and SDIF under the chairmanship under the chairmanship of the Deputy Prime Minister in charge of the Undersecretariat of the Treasury was created in 2011. The FSC aims to identify and mitigate emerging systemic risks and coordinate macroprudential policy actions. In order to further strengthen and support the FSC’s activities, the authorities established the Systemic Risk Assessment Group (SRAG) in October 2012. The SRAG was established by a protocol signed by the FSC members and its main mandate is to identify potential systemic risk areas, alert the FSC about potential systemic risks and improve coordination between member institutions for timely and consistent responses. The SRAG members are the FSC member institutions’ deputies, with the BRSA acting as the secretariat. The SRAG meets at least four times a year, and the minutes and outcomes of the meetings are reported to the FSC. The Financial Sector Commission (FSEC), consisting of the representatives of BRSA, Ministry of Finance, the Treasury, CBRT, CMB, SDIF, Competition Board, SPO, Istanbul Gold Exchange, securities stock exchanges, Futures and Options Markets and the associations of institutions is responsible for establishing and ensuring confidence, stability and the development of the financial markets. This Commission is meant to ensure exchange of information, cooperation and coordination among institutions and propose joint policies. It meets once every six months and shall brief the Council of Ministers regarding the results of its meetings. The article 98 of the BL, also determines the BRSA, Treasury Undersecretary, State Planning Organization Undersecretary, the SDIF and CBRT to exchange views regarding the implementation of monetary, credit and banking policies. Article 98 also contains provisions allowing the BRSA, SDIF and the CBRT to have access to the jointly-agreed databases of each other. The Coordination Committee (CC) composed by the BRSA and the SDIF aims to ensure cooperation in bank resolution. The committee meets quarterly to exchange views about the banking sector and other common issues. Particularly relevant for the supervision of conglomerates are protocols signed for information sharing between BRSA and other local authorities. These authorities includes the Treasury, CMB, SDIF, CBRT, General Directorate of Criminal Registration and Statistics, MASAK, Republic of Turkey Social Security Institution; TÜRKSAT A.Ş., Central Registration Institution and Turkish Competition Authority. There is evidence that these arrangements have been operating and discussing relevant issues. Bilateral protocols like the one signed by the BRSA and the Treasury seem particular relevant for exchange of information such as summaries of inspection reports between supervisors while committees such as the FSC and FSEC focus on more broad issues. | |||||||||||||||||||||
| EC2 | Arrangements, formal or informal, are in place for cooperation, including analysis and sharing of information, and undertaking collaborative work, with relevant foreign supervisors of banks and banking groups. There is evidence that these arrangements work in practice, where necessary. | |||||||||||||||||||||
| Description and findings re EC2 | The legal basis for formal cooperation and information sharing by the BRSA with other foreign supervisory authorities is found in Article 98 of the BL. The BRSA has signed MoUs with supervisory authorities of 34 countries. According to these agreements supervisors commit themselves to use their best endeavors to cooperate in routine supervisions and to notify and provide each other relevant information in a prompt and timely manner regarding any material supervisory concerns. Discussions on MoUs are underway with authorities of 5 additional countries. Article 98 of the BL authorizes the BRSA to cooperate with foreign supervisory authorities even in the absence of an MoU. In this case, eventual requests from foreign authorities are subject to BRSB’s approval considering the principle of reciprocity. The BRSA conducts on-site inspections in foreign jurisdictions in which Turkish banks and their subsidiaries operate and foreign supervisors conduct inspections in Turkey on the basis of reciprocity. When BRSA supervisors conduct on-site examination of banks in a foreign jurisdiction, findings are always shared with foreign supervisory authorities through official correspondence or meetings. Turkish supervisors also participate in supervisory colleges in foreign jurisdictions upon invitation. The BRSA, as a host supervisor authority, is an observer in some supervisory colleges of the global banks which also operate in Turkey. There is evidence of collaborative work. Refer to CP 13 for additional discussion. | |||||||||||||||||||||
| EC3 | The supervisor may provide confidential information to another domestic authority or foreign supervisor but must take reasonable steps to determine that any confidential information so released will be used only for bank-specific or system-wide supervisory purposes and will be treated as confidential by the receiving party. | |||||||||||||||||||||
| Description and findings re EC3 | The framework for the protection of confidential information is established in the article 73 of the BL that lays down the restrictions not only for domestic authorities but also foreign supervisors. In essence all data obtained by the BRSA by virtue of its supervisory activity are covered by professional secrecy. Nevertheless, the BL establishes several working arrangements that allow the exchange of information with other domestic and foreign authorities as long as the principle of confidentiality is appropriately maintained (see EC1 and EC2 above). The BRSA requires other supervisors to commit themselves to protect the information, including signing memorandums of understanding with specific confidentiality clauses. According to the BL, the agency does not share confidential information if it has any reason to believe that the counterparties will not maintain the confidentiality. The BL also forbids the BRSA to share confidential information with anyone who is not authorized by the BL or may use the information for own benefit | |||||||||||||||||||||
| EC4 | The supervisor receiving confidential information from other supervisors uses the confidential information for bank-specific or system-wide supervisory purposes only. The supervisor does not disclose confidential information received to third parties without the permission of the supervisor providing the information and is able to deny any demand (other than a court order or mandate from a legislative body) for confidential information in its possession. In the event that the supervisor is legally compelled to disclose confidential information it has received from another supervisor, the supervisor promptly notifies the originating supervisor, indicating what information it is compelled to release and the circumstances surrounding the release. Where consent to passing on confidential information is not given, the supervisor uses all reasonable means to resist such a demand or protect the confidentiality of the information. | |||||||||||||||||||||
| Description and findings re EC4 | According to the article 73 of the BL, the BRSB is responsible for keeping the confidentiality of information and documents obtained within or outside the scope of MoUs. Confidential information and documents obtained by the Agency may be used for the purposes of licensing, supervision, monitoring compliance with legislation and for administrative lawsuits filed against the decisions of the Board. The confidential information and documents obtained by the BRSA cannot be disclosed to any person or entity, other than the public prosecutors and criminal courts if and when needed in the course of criminal proceedings and prosecutions. Additionally, protocols on information exchange that the BRSA has signed with other domestic authorities contain provisions establishing the confidentiality clauses of the BL. As explained in EC3, all data obtained by the BRSA by virtue of its supervisory activity are covered by professional secrecy. MoUs with foreign authorities contain clauses stating that the provided information is subject to confidentiality and should be used only for supervisory purposes. These clauses also establish that when the supervisor is legally compelled to disclose confidential information it has received from another supervisor, the supervisor promptly notifies the originating supervisor. | |||||||||||||||||||||
| EC5 | Processes are in place for the supervisor to support resolution authorities (e.g., central banks and finance ministries as appropriate) to undertake recovery and resolution planning and actions. | |||||||||||||||||||||
| Description and findings re EC5 | The Turkish resolution authority for credit institutions, including the branches and subsidiaries of foreign banks established in Turkey, participation banks (“Islamic banks”) and financial holding companies is the SDIF. The role of the BRSA in the resolution process is to initiate the resolution and decide on the transfer of a failed bank to the SDIF either by revoking its operating license or by transferring its management and control as defined in the article 71 of the BL. As described in EC1, the CC created by the BL ensures coordination between the two authorities on bank resolution. Following the notification of the BRSA that a bank is asked to take corrective, rehabilitative, or restrictive measures the SDIF develops a bank-specific Resolution Action Plan. The Resolution Action Plan includes alternative bank-specific resolution plans, a verification process for determining the amount of insured deposits to be covered and plans for the rapid deployment of the personnel for the purpose of safeguarding the information technology (IT) systems and data of the bank. However, there is no framework for ex ante recovery and resolution planning in Turkey. The BRSA and the SDIF have formed a joint working group that is currently in the process of developing policy proposals and necessary amendments to the legislation. | |||||||||||||||||||||
| Assessment of Principle 3 | Compliant | |||||||||||||||||||||
| Comments | Legal provisions as well as operational frameworks for cooperation and collaboration with domestic and foreign authorities are in place. Protections on confidentiality appear appropriate. Regarding the lack of processes for recovery and resolution planning, the assessors do not see their absence as reflecting a lack of collaboration between authorities. See also CP9. | |||||||||||||||||||||
| Principle 4 | Permissible activities. The permissible activities of institutions that are licensed and subject to supervision as banks are clearly defined and the use of the word “bank” in names is controlled. | |||||||||||||||||||||
| Essential criteria | ||||||||||||||||||||||
| EC1 | The term “bank” is clearly defined in laws or regulations. | |||||||||||||||||||||
| Description and findings re EC1 | The term “bank” is defined in the BL Article 3 as deposit banks, participation banks and development and investment banks. Deposit banks are defined as the institutions operating primarily for the purpose of accepting deposit and granting loan in their own names and for their own accounts. Participation banks are those operating primarily for the purposes of collecting fund through special current accounts and participation accounts and granting loan. Finally, development and investment banks are those operating primarily for the purposes of granting loan or to fulfill the duties assigned by their special laws, other than accepting deposit or participation funds. | |||||||||||||||||||||
| EC2 | The permissible activities of institutions that are licensed and subject to supervision as banks are clearly defined either by supervisors, or in laws or regulations. | |||||||||||||||||||||
| Description and findings re EC2 | The BL defines the activities that banks are permitted to perform and prohibited to carry out. According to article 4, banks may perform a broad range of activities including accepting deposits or participation funds, granting loans, either cash or non-cash, carrying out any type of payment and collection transactions, including cash and deposit payment and fund transfer transactions, correspondent bank transactions, or use of check accounts, purchasing transactions of commercial bills, safe-keeping services, issuing payment instruments such as credit cards, carrying out foreign exchange transactions, trading of money market instruments, trading of precious metals and stones, trading and intermediation of forward, future and option contracts, purchase and sale of capital market instruments and repurchasing or re-sale commitments, intermediation for issuance or public offering of capital market instruments, transactions for trading previously issued capital market instruments for intermediation purposes, guarantee transactions like undertaking guarantees and other liabilities in favor of other persons, investment counseling services, portfolio operation and management, primary market dealing for purchase-sales transactions, factoring, financial leasing services, insurance agency and individual private pension fund services. The BL also allows banks to perform “other activities to be determined by the Board”. The BRSA has explained that these activities are mostly on advisory services and operational support, particularly for subsidiaries. Banks’ requests to perform other activities are analyzed according to the supervisory opinion on the specific case and principles settled by the BRSB. | |||||||||||||||||||||
| EC3 | The use of the word “bank” and any derivations such as “banking” in a name, including domain names, is limited to licensed and supervised institutions in all circumstances where the general public might otherwise be misled. | |||||||||||||||||||||
| Description and findings re EC3 | According to the article 150 of the BL legal persons who do not have a license are prohibited to use the business title of a bank in notices, advertisements and public statements. It is also prohibited to use other words and expressions which could create the impression that they were accepting deposits or participation funds or acting as a bank. Penalties for the breach of these rules are imprisonment and judicial fines for real persons and close of the business places where the offense is committed. | |||||||||||||||||||||
| EC4 | The taking of deposits from the public is reserved for institutions that are licensed and subject to supervision as banks.10 | |||||||||||||||||||||
| Description and findings re EC4 | Art. 60 of the BL establishes that only credit institutions, that are supervised by BRSA are permitted to accept deposits or participation funds. Accepting deposits without permission of the BRSA is legally punishable. | |||||||||||||||||||||
| EC5 | The supervisor or licensing authority publishes or otherwise makes available a current list of licensed banks, including branches of foreign banks, operating within its jurisdiction in a way that is easily accessible to the public. | |||||||||||||||||||||
| Description and findings re EC5 | The list of licensed banks and branches is published and updated regularly on the BRSA’s website. According to the Article 10 of the BL, the permissions granted shall be published in the Official Gazette. | |||||||||||||||||||||
| Assessment of Principle 4 | Compliant | |||||||||||||||||||||
| Comments | The BL provides clear definitions of activities that are only permitted to be conducted by registered banks, including taking deposits from the public. | |||||||||||||||||||||
| Principle 5 | Licensing criteria. The licensing authority has the power to set criteria and reject applications for establishments that do not meet the criteria. At a minimum, the licensing process consists of an assessment of the ownership structure and governance (including the fitness and propriety of Board members and senior management)11 of the bank and its wider group, and its strategic and operating plan, internal controls, risk management and projected financial condition-(including capital base). Where the proposed owner or parent organization is a foreign bank, the prior consent of its home supervisor is obtained. | |||||||||||||||||||||
| Essential criteria | ||||||||||||||||||||||
| EC1 | The law identifies the authority responsible for granting and withdrawing a banking license. The licensing authority could be the banking supervisor or another competent authority. If the licensing authority and the supervisor are not the same, the supervisor has the right to have its views on each application considered, and its concerns addressed. In addition, the licensing authority provides the supervisor with any information that may be material to the supervision of the licensed bank. The supervisor imposes prudential conditions or limitations on the newly licensed bank, where appropriate. | |||||||||||||||||||||
| Description and findings re EC1 | The BL identifies the BRSA as both the licensing and supervisory authority in Turkey. According to article 6 of the BL, the establishment of a bank in Turkey or the opening up of the first branch in Turkey by a bank established abroad needs to be approved by the BRSB. The licensing of banks in Turkey is a two-step process that includes on-site supervisors and several prudential conditions that needs to be fulfilled by banks. The whole process is conducted by the BRSA. See a description in EC2. During the last five years four banks were granted a license to operate in Turkey. | |||||||||||||||||||||
| EC2 | Laws or regulations give the licensing authority the power to set criteria for licensing banks. If the criteria are not fulfilled or if the information provided is inadequate, the licensing authority has the power to reject an application. If the licensing authority or-supervisor determines that the license was based on false information, the license can be revoked. | |||||||||||||||||||||
| Description and findings re EC2 | Article 7 of the BL establishes a number of conditions that needs to be fulfilled for the establishment of banks in Turkey including that:
In addition to the establishment permission, banks need to request the BRSA permission for operation. The banks that have an establishment permission are required to meet additional criteria including:
The establishment permission of a bank can be revoked by a Board decision in case of one or more of the following conditions (BL, art. 11):
During the last five years one licensed was surrender. None have been revoked. | |||||||||||||||||||||
| EC3 | The criteria for issuing licenses are consistent with those applied in ongoing supervision. | |||||||||||||||||||||
| Description and findings re EC3 | As described in EC 2, the BL provides criteria for authorization and registration that are consistent with those applied for ongoing supervision. | |||||||||||||||||||||
| EC4 | The licensing authority determines that the proposed legal, managerial, operational and ownership structures of the bank and its wider group will not hinder effective supervision on both a solo and a consolidated basis.12 The licensing authority also determines, where appropriate, that these structures will not hinder effective implementation of corrective measures in the future. | |||||||||||||||||||||
| Description and findings re EC4 | Among the criteria imposed by the BL for the establishment of banks it is set out that the ownership structure required does not hamper effective supervision on both a solo and a consolidated level. There are also criteria for clear ownership structures that do not hinder the implementation of corrective measures (see EC2 above for details). | |||||||||||||||||||||
| EC5 | The licensing authority identifies and determines the suitability of the bank’s major shareholders, including the ultimate beneficial owners, and others that may exert significant influence. It also assesses the transparency of the ownership structure, the sources of initial capital and the ability of shareholders to provide additional financial support, where needed. | |||||||||||||||||||||
| Description and findings re EC5 | The BL (article 8) establishes criteria for bank’s founders and natural person shareholder of the legal person founder with qualified shares of banks. These criteria include:
In order to assess the above mention criteria, the BRSA (RTSPIO Art. 4) demands a series of documents such as tables showing the shareholding structure of legal entity founders until their natural partners, lists showing shareholder eventual privileged shares, legal documents stating that qualified shareholders have not been declared bankruptcy, criminal records of qualified shareholders, reports on the financial status of qualified shareholders and commitments to declare the source of capital. The enforcement department of the BRSA analyses all the documents following internal manuals that list topics that should be considered, including when assessing financial strength of the shareholders. In terms of initial capital, according to Article 7of RTSPIO, the Agency examines whether the capital of the bank applying for operating permission has been paid in cash in a manner free of any fictitious transactions and whether it is in an appropriate level. The initial capital of the bank that is transferred to the bank accounts is checked by on-site supervisors that also assess whether the amount of capital is sufficient to fulfill the planned activities. | |||||||||||||||||||||
| EC6 | A minimum initial capital amount is stipulated for all banks. | |||||||||||||||||||||
| Description and findings re EC6 | BRSA has stipulated a minimum capital amount of 300 million USD for all banks (see EC2 above). | |||||||||||||||||||||
| EC7 | The licensing authority, at authorization, evaluates the bank’s proposed Board members and senior management as to expertise and integrity (fit and proper test), and any potential for conflicts of interest. The fit and proper criteria include: (i) skills and experience in relevant financial operations commensurate with the intended activities of the bank; and (ii) no record of criminal activities or adverse regulatory judgments that make a person unfit to uphold important positions in a bank.13 The licensing authority determines whether the bank’s Board has collective sound knowledge of the material activities the bank intends to pursue, and the associated risks. | |||||||||||||||||||||
| Description and findings re EC7 | As described in EC2 the conditions for the establishment of banks in Turkey includes fit and proper criteria for board members. The BL establishes that the majority of the board of directors should meet the qualifications for general manager that includes: not have been declared bankrupt, have not been sentenced to heavy imprisonment or convicted of serious crimes, have at least undergraduate degrees in suitable disciplines and have at least ten years of professional experience in the field of banking or business administration. The Deputy general managers must have at least seven years of professional experience and at least two thirds of them must have at least undergraduate degree in suitable disciplines. Even if employed with different position titles, other executives whose authority and duties are comparable to a deputy general manager or who occupy higher executive positions are subject to the provisions pertaining to deputy general managers. The suitability criterion is evaluated through documents attesting the educational and professional background. The documentation that should be provided to the BRSA is specified in regulation (RSMOD). Apart from educational and professional background, the BRSA also checks if there is no record of criminal activities or adverse regulatory judgments that make a person unfit to uphold managerial positions in a bank. The BRSA does not impose requirements and does not assess if the board of the bank has a collective sound knowledge of the material activities the bank intends to pursue. | |||||||||||||||||||||
| EC8 | The licensing authority reviews the proposed strategic and operating plans of the bank. This includes determining that an appropriate system of corporate governance, risk management and internal controls, including those related to the detection and prevention of criminal activities, as well as the oversight of proposed outsourced functions, will be in place. The operational structure is required to reflect the scope and degree of sophistication of the proposed activities of the bank.14 | |||||||||||||||||||||
| Description and findings re EC8 | As noted in EC2, the criteria for the establishment of banks in Turkey include the harmony of the envisaged activities with planned financial, managerial and organizational structure. The BL also demands the applicant bank to submit to the BRSA the work plans for the envisioned fields of activity, the projections regarding the financial structure of the institution including capital adequacy, the budgetary plan for the first three years and an activity program including internal control, risk management and internal audit system. The RTSPIO demands applicants to send “an operational program, which analyzes benefits expected from establishment of the bank, indicates operations to be carried out and operational plans containing methods of achieving internal supervision, internal control and risk management and incorporates the financial structure of the organization in a manner also containing the capital adequacy of the relevant projections, thereof.” The projections and operational program of the proposed bank is assessed and reviewed with comparison to existing banks in Turkish banking sector that engages in similar activities and have a similar structure. Internal manuals guide the process listing issues that should be considered by supervisors. Compliance with corporate governance regulations, including risk management and internal control systems and IT systems are assessed in on-site supervision before the operating permission is granted. | |||||||||||||||||||||
| EC9 | The licensing authority reviews pro forma financial statements and projections of the proposed bank. This includes an assessment of the adequacy of the financial strength to support the proposed strategic plan as well as financial information on the principal shareholders of the bank. | |||||||||||||||||||||
| Description and findings re EC9 | The BL demands the founders of banks to have the necessary financial strength and reputation. These criteria and financial projections of the proposed bank are assessed by the BRSA during the licensing process (please also refer to EC 2 for details). | |||||||||||||||||||||
| EC10 | In the case of foreign banks establishing a branch or subsidiary, before issuing a license, the host supervisor establishes that no objection (or a statement of no objection) from the home supervisor has been received. For cross-border banking operations in its country, the host supervisor determines whether the home supervisor practices global consolidated supervision. | |||||||||||||||||||||
| Description and findings re EC10 | The criteria for the establishment of foreign banks in Turkey includes that the bank primary activities must not have been prohibited in the country where they are headquartered and that the home supervisor do not have negative views regarding its operation in Turkey. In order to assess these requirements, the BRSA requires a “no objection letter” from the home supervisor (RTSPIO). Nevertheless, there is no determination that the home supervisor practices global consolidated supervision. | |||||||||||||||||||||
| EC11 | The licensing authority or supervisor has policies and processes to monitor the progress of new entrants in meeting their business and strategic goals, and to determine that supervisory requirements outlined in the license approval are being met. | |||||||||||||||||||||
| Description and findings re EC11 | During the license approval process, banks are instructed on issues that need improvements and eventual recommendations to correct deficiencies are shared with on-site supervisors who are responsible for following them up. As explained in EC2, licensing is a two-step process. The period between the establishment permission and the operation permission is a monitoring phase with a special focus on governance and operational requirements. Once the bank starts operating, supervision procedures follow the ones applicable to all banks. These procedures include assessing the actual performance of banks in relation to their business plans. | |||||||||||||||||||||
| Assessment of Principle 5 | Largely Compliant | |||||||||||||||||||||
| Comments | Provisions in the laws and regulations related to licensing and the process followed by the BRSA provide a comprehensive framework to assess the adequacy of new registrations for banks, including foreign bank branches. The BRSA seems to have a broadly sound process to assess applications in practice. However, in order to maintain a licensing process fully compliant with the principle, the BRSA needs to additionally: i) impose requirements and assess if the bank’s board has a collectively sound knowledge of the material activities the bank intends to pursue; and ii) for cross-border banking operations, determine whether the home supervisor practices global consolidated supervision. | |||||||||||||||||||||
| Principle 6 | Transfer of significant ownership. The supervisor15 has the power to review, reject and impose prudential conditions on any proposals to transfer significant ownership or controlling interests held directly or indirectly in existing banks to other parties. | |||||||||||||||||||||
| Essential criteria | ||||||||||||||||||||||
| EC1 | Laws or regulations contain clear definitions of “significant ownership” and “controlling interest”. | |||||||||||||||||||||
| Description and findings re EC1 | According to the Article 3 of the BL, “control” is defined as “the power to appoint or remove from office the decision-taking majority of members of board of directors through direct or indirect possession of the majority of a legal entity’s capital irrespective of the requirement of owning minimum 51 % of its capital; or by having control over the majority of the voting right as a consequence of holding privileged shares or of agreements with other shareholders although not owning the majority of capital”. The concept of “Significant ownership” is referred in the BL as “qualified shares” and is defined as “the shares that represent, directly or indirectly, 10 % or more of the capital or voting rights of an undertaking or that yield the privilege to appoint members to board of directors even though such rate is below 10 %”. The BL also define “dominant partner” as “natural or legal entities that directly or indirectly, individually or jointly control an undertaking”. | |||||||||||||||||||||
| EC2 | There are requirements to obtain supervisory approval or provide immediate notification of proposed changes that would result in a change in ownership, including beneficial ownership, or the exercise of voting rights over a particular threshold or change in controlling interest. | |||||||||||||||||||||
| Description and findings re EC2 | The BL establish requirements for approval of changes in ownership. Article 18 of the BL requires the permission of the BRSA for:
The documents that are required to be submitted for transfer of ownership are listed in Article 11 of Regulation on Transactions Subject to Permission and Indirect Shareholding (RTSPIO). | |||||||||||||||||||||
| EC3 | The supervisor has the power to reject any proposal for a change in significant ownership, including beneficial ownership, or controlling interest, or prevent the exercise of voting rights in respect of such investments to ensure that any change in significant ownership meets criteria comparable to those used for licensing banks. If the supervisor determines that the change in significant ownership was based on false information, the supervisor has the power to reject, modify or reverse the change in significant ownership. | |||||||||||||||||||||
| Description and findings re EC3 | The BRSA has the power to reject any proposal for a change in significant ownership, (article 18 of the BL), as each material change (according to predefined thresholds) requires its permission (see also EC2). According to the Article 18 of the BL, the shareholders with qualified shares who do not bear the conditions required for founders any more shall not benefit from the shareholder rights other than dividends. In such cases, other shareholder rights shall be exercised by SDIF, upon the notification of BRSA. Such shareholders shall not use their preferential rights until the rate of their direct or indirect shares in the capital fall below 10 %. If BRSA determines that the change in significant ownership was based on false information, according to the article 155 of BL, those persons may be sentenced to imprisonment from one year to three years and a judicial fine which shall not be less than 1,500 days. | |||||||||||||||||||||
| EC4 | The supervisor obtains from banks, through periodic reporting or on-site examinations, the names and holdings of all significant shareholders or those that exert controlling influence, including the identities of beneficial owners of shares being held by nominees, custodians and through vehicles that might be used to disguise ownership. | |||||||||||||||||||||
| Description and findings re EC4 | Banks are required to submit their detailed shareholders structure on a monthly basis by means of a surveillance report. This report covers name and country of the owner, the size of holding, share percentage, control type (qualified, preferred shares, jointly control, non-controlling share etc.) and the way of ownership (directly owned, from public offering). Additionally, in order to evaluate qualified legal entity shareholders’ ownership structure, the BRSA requires one additional surveillance report semiannually. | |||||||||||||||||||||
| EC5 | The supervisor has the power to take appropriate action to modify, reverse or otherwise address a change of control that has taken place without the necessary notification to or approval from the supervisor. | |||||||||||||||||||||
| Description and findings re EC5 | According to the Article 18 of the BL, transferring of shares affected without permission shall not be recorded in the book of shares. Any records made in the book of shares in breach of the foregoing provision shall be null and void. Furthermore, article 18 also establishes that in cases where the shares are transferred without the permission of the Board, the shareholder rights of the legal entity stemming from these shares, other than dividends, shall be exercised by the SDIF. | |||||||||||||||||||||
| EC6 | Laws or regulations or the supervisor require banks to notify the supervisor as soon as they become aware of any material information which may negatively affect the suitability of a major shareholder or a party that has a controlling interest. | |||||||||||||||||||||
| Description and findings re EC6 | According to 11(5) of RTSPIO “The board of directors is under obligation to take actions and measures for determination of whether a prior consent of the [BRSA] Board is taken for participants of bank general assembly meetings within the frame of obligations arising out of Article 18 of the Law, except for third, seventh and eighth paragraphs thereof.” The BRSA explained that in order to fulfill the determination of the RTSPIO mentioned above as well as the determinations of article 18 of the BL, banks notify the BRSA when a shareholder no longer meets the criteria for major shareholders. | |||||||||||||||||||||
| Assessment of principle 6 | Compliant | |||||||||||||||||||||
| Comments | The power given to the supervisor by laws and regulations as well as the current procedures provide broadly sound control and oversight regarding significant ownership of a bank and a controlling company. | |||||||||||||||||||||
| Principle 7 | Major acquisitions. The supervisor has the power to approve or reject (or recommend to the responsible authority the approval or rejection of), and impose prudential conditions on, major acquisitions or investments by a bank, against prescribed criteria, including the establishment of cross-border operations, and to determine that corporate affiliations or structures do not expose the bank to undue risks or hinder effective supervision. | |||||||||||||||||||||
| Essential criteria | ||||||||||||||||||||||
| EC1 | Laws or regulations clearly define:
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| Description and findings re EC1 | Turkish laws and regulations require that all banks investments, with the exception of banks trading operations, need supervisory approval. Cross border investments of banks require the BRSA approval according to the article 14 of the BL and article 9 of RTSPIO. In order to be allowed to make a cross border investment, banks’ practices should be in line with corporate governance and safeguarding provisions of the BL. Furthermore, there should be no obstacles in gathering information and executing supervision on the cross border company. Previous permission for participating or establishing a domestic partnership is required by the article 8 of the RTSPIO. Additionally, article 57 of the BL prohibits banks to invest in entities whose main field of activity is property trading, except for mortgage financing institutions and real estate investment trusts. The mentioned provisions of RTSPIO are not applied on investments made on shares for trading purposes, or on acquisition of shares solely for collection and recovery of receivables, or on participation in capital increases of partnerships. Finally, article 56 of the BL limits the acquisition of shares by banks at undertakings other than credit institutions and financial institutions at an amount of 15% of its own funds, and the total amount of its shares in these undertakings shall not be more than 60 % of its own funds. Any investment in excess of the above limits is deducted from bank’s equity for capital adequacy purposes. | |||||||||||||||||||||
| EC2 | Laws or regulations provide criteria by which to judge individual proposals | |||||||||||||||||||||
| Description and findings re EC2 | The regulatory framework determines that the investment of banks domestically and abroad needs to comply with corporate governance and protective provisions. According to article 14 of the BL, banks established in Turkey may open branches or representative offices abroad, including off-shore banking regions, set up undertakings or participate in existing undertakings on the condition that they comply with the corporate governance and protective provisions, such as capital and liquidity adequacy or large exposures limits (article 43, 44, 45, 46, 54, 57 of BL). According to the article 8 of RTSPIO, banks established in Turkey may set up undertakings or participate in existing undertakings at home as long as they comply with the corporate governance and protective provisions, such as capital and liquidity adequacy or large exposures limits (article 43, 44, 45, 46, 54, 57 of BL) and the principles established by BRSB. The permission to allow the investments is decided by the BRSA board. Article 9 of RTSPIO requires banks planning to invest in or establish foreign entities to submit to the BRSA a detailed feasibility study indicating sums of funds necessary, an analysis of costs and benefits concerning the proposed activity, estimated balance sheets, cash flows and profit/loss schedules which set forth targets for three years from foundation. The assessors could see examples showing that in practice the application of articles 8 and 9 of RTSPIO require the applicant banks to be compliant with management, internal systems, financial reporting and prudential requirements such as capital adequacy, liquidity, asset quality, provisioning and large exposures limits as stipulated in the BL and regulations. The BRSA also verifies that there should be no obstacles in gathering information and conducting supervision of the cross border company. If needed, the BRSA may require an MoU with the host supervisory authority. | |||||||||||||||||||||
| EC3 | Consistent with the licensing requirements, among the objective criteria that the supervisor uses, is that any new acquisitions and investments do not expose the bank to undue risks or hinder effective supervision. The supervisor also determines, where appropriate, that these new acquisitions and investments will not hinder effective implementation of corrective measures in the future.16 The supervisor can prohibit banks from making major acquisitions/investments (including the establishment of cross-border banking operations) in countries with laws or regulations prohibiting information flows deemed necessary for adequate consolidated supervision. The supervisor takes into consideration the effectiveness of supervision in the host country and its own ability to exercise supervision on a consolidated basis. | |||||||||||||||||||||
| Description and findings re EC3 | The BRSA analyses, as part of the approval process, the risks posed by new acquisitions and investments to the banking group. The analysis is performed mainly by the evaluation of a detailed feasibility study submitted by banks. Compliance with prudential measures such as capital and liquidity adequacy is also verified. Please also refer to EC2. Powers attributed to the BRSA by the BL allows effective supervision of domestic undertakings (see CP 1 and 12 for discussion). Consistent with the licensing criteria, according to Article 9 of RTSPIO, there should be no obstacles in gathering information and conducting supervision of the cross border company and, where necessary, the BRSA may require an MoU with the host supervisory authority. Nevertheless, there is no explicit consideration about the effectiveness of supervision in the host countries. | |||||||||||||||||||||
| EC4 | The supervisor determines that the bank has, from the outset, adequate financial, managerial and organizational resources to handle the acquisition/investment. | |||||||||||||||||||||
| Description and findings re EC4 | Based on the laws and regulations explained in EC 2, banks are required to submit a detailed feasibility study indicating necessary resources, costs and benefits analysis of the proposed activity, estimated balance sheets and cash flows and profit/loss estimates for the following three years from foundation. The BRSA evaluates the submitted study during the process of granting permission. The regulation (RTSPIO) is explicit about the required study only for cross border investments, but the assessors also observed examples where domestic investments were analyzed in similar terms. Additionally, Article 8/7 of RTSPIO requires banks to submit a report explaining the reasoning behind the proposed domestic investment. | |||||||||||||||||||||
| EC5 | The supervisor is aware of the risks that non-banking activities can pose to a banking group and has the means to take action to mitigate those risks. The supervisor considers the ability of the bank to manage these risks prior to permitting investment in non-banking activities. | |||||||||||||||||||||
| Description and findings re EC5 | The assessment of the risks that non-banking activities can pose to a banking group is mostly assessed in the CAMELS rating process (see CP8). The process involves the assessment of many topics, including the risk that subsidiaries and other entities of the group may represent to the bank. The Internal Capital Adequacy Assessment Process of Banks (ICAAP) and its revision by the supervisor also address risks from non-banking activities. The opinion formulated on these assessments is reflected in the decision to permit banks to invest in non-banking activities. Finally, the BL sets limit for investing in non-financial activities. According to article 56 of BL, a bank shall not acquire shares in entities other than credit institutions and financial institutions in excess of 15 % of its own funds, and the total amount of such investments shall not be more than 60 %of its own funds. Any investment in excess of the above limits reduce bank’s equity for capital adequacy purposes. | |||||||||||||||||||||
| AC1 | The supervisor reviews major acquisitions or investments by other entities in the banking group to determine that these do not expose the bank to any undue risks or hinder effective supervision. The supervisor also determines, where appropriate, that these new acquisitions and investments will not hinder effective implementation of corrective measures in the future.17 Where necessary, the supervisor is able to effectively address the risks to the bank arising from such acquisitions or investments. | |||||||||||||||||||||
| Description and findings re AC1 | ||||||||||||||||||||||
| Assessment of Principle 7 | Compliant | |||||||||||||||||||||
| Comments | The regulatory framework subjects major acquisitions and investments by banks and controlling companies to prior approval by the BRSA. The BRSA also has well established supervisory practices to limit and monitor risks arising from such activities. Going forward, supervisors should consider more extensively and formally the effectiveness of supervision in host countries. | |||||||||||||||||||||
| Principle 8 | Supervisory approach. An effective system of banking supervision requires the supervisor to develop and maintain a forward-looking assessment of the risk profile of individual banks and banking groups, proportionate to their systemic importance; identify, assess and address risks emanating from banks and the banking system as a whole; have a framework in place for early intervention; and have plans in place, in partnership with other relevant authorities, to take action to resolve banks in an orderly manner if they become non-viable. | |||||||||||||||||||||
| Essential criteria | ||||||||||||||||||||||
| EC1 | The supervisor uses a methodology for determining and assessing on an ongoing basis the nature, impact and scope of the risks:
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| Description and findings re EC1 | The supervisory approach of the BRSA is defined in the RAA as a dynamic risk-focused (RFS) one that aims to ensure efficiency, continue adequacy of supervision and efficient allocation of supervisory resources. The approach proposes to shape supervision form, scope, time, content and intensity based on the risk profile and adequacy of internal controls and risk management systems of each institution. The BRSA’s methodology for ongoing supervision of banks, established in the Supervisory Manual on Banking Supervision Process (SMBSP) is organized in supervisory cycles that last one year. Main Players Three different departments play major roles in the supervisory cycle: - The audit departments are responsible for on-site inspections. That includes special inspections, complementary inspections and the Camels rating system (see below). - The off-site department analyzes various indicators related to bank’s financial performance in different periods and prepares periodical reports on issues of concern. The analysis made by the off-site team aims to provide feedback and early warning mechanism for emerging risks for on-site inspections. - The enforcement department is responsible for the formal communication between banks and the BRSA in relation to corrective measures. Findings of the audit and off-site department are analyzed by the enforcement department that proposes supervisory actions to the BRSB or another competent authority within the BRSA. Planning The first phase of the cycle is the strategic planning. Based on previous accumulated knowledge this phase sets a high level plan for on-site inspections, listing the banks that will be assessed and broadly allocating the personal for each activity. The plan is elaborated by the heads of the audit departments and is approved by the chairman. One of the main inputs of the planning phase is the risk profile of the bank, represented by its supervisory rating and its systemic importance. More specifically, the SMBSP determines that the minimum frequency of inspections depends on: - The sector share (SS) of bank’s total risk weighted exposure amount, - Bank’s final rating which is assigned by the supervision team at the end of the supervision process. (10 is the worst, 1 is the best rating) Banks are mapped into three different categories, “red”, “yellow” and “green”, based on the above indicators and the following matrix:
Banks in the “red” category are examined on-site annually, banks in the “yellow” category are examined at least once every two years and the banks in “green” category are examined at least once every three years. The BRSA explained that even though the rule would allow some of the largest banks to be assessed every other year, in practice they are examined annually due to its systemic importance. Identification of Risk Areas (IRA) Banks selected to be assessed on-site are subject to the IRA phase of the supervisory cycle. The IRA aims to provide a snapshot of the risks of different areas of the bank. This phase is meant to be a short initial assessment based mainly on previous available information, including the latest risk matrix and profile, CAMELS rating, internal capital adequacy assessment process (ICAAP) report, special and complementary inspections and off-site reports. The IRA produces an initial opinion about the riskiness of different areas of the bank and a supervision plan identifying the specific areas that are going to be subject to special inspections. Camels rating assessment is performed in all other areas. Special Inspections (SI) Special Inspections (SI), as described in the Supervisory Manual on Special Inspections Report, are detailed on-site inspections meant to assess risks and quality of management in a particular area under inspection. SI are meant to reveal problems that have the potential to affect the financial soundness of the bank and identify measures that should be required from banks to resolve eventual problems and mitigate risks. The number of Special Inspections conducted in 2014 and 2015 were 61 and 44 respectively. Among these 105 SI, there were 70 SI conducted on loan portfolios in 27 different banks. SIs are deep evaluations performed in three levels. The first level checks the adequacy of internal evaluations made by banks aiming to determine whether or not the bank manages well its activities and risks arising from those activities. The second level contrasts banks practices with BRSA best practice guidelines and finally, the last level examine specific transactions and operations through sampling methodology looking for potential issues that might affect the financial soundness of the bank. SIs may have different themes, for instance, specific credit portfolios, business model and profitability, information systems, liquidity management and derivatives among others. CAMELS rating and risk profile The CAMELS rating phase of the supervisory cycle is conducted by analyses of the financial soundness of the bank and the assessment of the efficiency of the bank’s general risk profile, risk management and internal control and internal audit systems. The analyses is guided by a series of almost five hundred questions, contained in the Annex of the General Assessment Report (GAR), that supervisors are required to answer using as inputs the IRA evaluation, SI and ICAAP reports, banks data and discussion with bank managers. Relevant information is scanned and included in system in order to substantiate the response to the questions. The results of this phase are a financial structure and rating report, risk matrix, risk profile and their view of the ICAAP report submitted by banks. Complementary analyses. Once the SI and rating processes are completed, the BRSA executes a series of additional on-site inspections that usually have a stronger compliance nature. These inspections cover issues such as legal concerns, policies and processes on anti-money laundering and combating the financing of terrorism (AML/CFT) and follow up on supervisory findings and consumer complaints. Also see CP 29 to discussion on AML/CFT inspections. Additionally, supervision teams may also perform thematic reviews considering developments and trends in the banking sector or significant specific changes to the operation of the bank. Banks not been assessed on-site Banks within “yellow” and “green” categories, that are not been assessed on-site in one particular year (e.g., have not been submitted to IRA, SI, rating and complementary inspections) should be assessed by the supervision teams of the audit department at least every six month (green category) or quarterly (yellow) through off-site reports including “Monthly Report of Follow-Up of Compliance with Legal Limits”, “Monthly Report of Ratios Follow-Up” and “Monthly Report”. The SMBSP manual requests that the evaluations shall not be limited to the mentioned surveillance reports but also take into account the effects of current macroeconomic developments on the financial soundness of the bank, as well as the changes in shareholder structure and similar issues. Off-site supervision During the whole process, on-site supervision teams from the audit department have access to off-site reports regarding banks and other financial companies on a solo and consolidated basis. These reports include stress test and various prudential ratios of the bank and its peers. Additionally, during on-site inspections, supervisors have easy access to comprehensive databases with information of banks and its groups. See CP 10 for additional information. Furthermore, within the scope of the off-site supervision function, the BRSA monitors individual banks and the banking sector as a whole, evaluates potential risks and informs on-site teams and upper management about present or emerging vulnerabilities. Bank surveillance reports, periodic and non-periodic thematic reports, stress tests and banking sector presentations are the main outputs of off-site supervision (also refer to CP 9). Practice The assessors reviewed examples of inputs, working papers and outputs of the different phases of the supervisory cycle. The review suggested that the practical implementation of the supervisory manuals face challenges that might hinder the quality of the process and its products. One of the shortcomings is an excessive compliance nature of the inspections. Although the declared goal of all the different inspections is to evaluate the risks faced by the bank, in practice the inspections appear to focus extensively on establishing compliance with the different regulations. The inspections seem to fall short of developing a clear view on the risks faced and posed by the bank and particularly important on the potential need for broader and more forceful supervisory action. To support this process, supervisors need to establish and highlight the implications of the findings of specific inspections for the broader risk assessment of the bank, which frequently does not seem to be the case. Another point that needs to be considered is the strength and weaknesses of the CAMELS rating process. The process is comprehensive and requires supervisors to collect a large set of information to be able to provide answers on almost five hundred different criteria. Nevertheless, it is important to recognize that, by its own nature, the analyses executed by the supervisor during the rating process cannot be as deep and comprehensive as the ones performed, for example, during special inspections. The relatively limited nature of the ratings is expected and is not necessarily a problem if supervisors frequently take more detailed approaches to inspect the bank. It is not enough to inspect a number of issues only during the ratings process. BRSA should not take excessive comfort from the fact that some issues are analyzed during this phase. From time to time, the scope of special inspections needs to encompass issues that currently seem to be addressed only during the ratings phase. Regarding banks that have not been selected to be inspected in one particular year, it was not possible to verify what kind of supervisory attention is given to them due to the fact that the supervisors’ analyses of off-site reports, do not typically deliver a formal assessment. Nevertheless, the possibility embedded in the current methodology of leaving some banks without a structured supervisory assessment for up to three years seems inadequate. Finally, the BRSA has not started to assess the resolvability of banks. | |||||||||||||||||||||
| EC2 | The supervisor has processes to understand the risk profile of banks and banking groups and employs a well-defined methodology to establish a forward-looking view of the profile. The nature of the supervisory work on each bank is based on the results of this analysis. | |||||||||||||||||||||
| Description and findings re EC2 | As described in EC 1 and in the Supervisory Manual on Banking Supervision Process (SMBSP), the BRSA has a process to understand the risk profile of the banks. Different phases of the supervisory cycle aim to deepen the understanding of the banks risks. From the initial IRA until the Camels rating, the results of the previous phases are used to guide the work that is done subsequently. The criteria for risk assessment are well established in the Supervisory Manual on Risk Assessment Criteria (SMRAC). The final products of the supervisory cycle, particularly the risk matrix and risk profile aims to show the risk types and levels which the banks are exposed to. The most important forward looking element of the methodology is the ICAAP assessment that involves capital projections, by banks, for the following three years under different economic scenario. Nevertheless, the revision of supervisors’ working papers and discussion with banks suggested that the process still is in a learning phase. The quality of banks reports and the scrutiny of the reports by supervisors need to develop further before the results can be more extensively used. Furthermore, as part of the off-site supervision efforts, the BRSA performs top-down stress testing analyses (please refer to CP9). The methodology could provide an important forward looking tool to deepen the assessment of the risk profile of banks and drive supervisory action but the assessors saw little evidence of its use currently during the banks’ assessment process. Finally, the CAMELS rating system and the matrix used to summarize the risk profile of the banks does not have an explicit forward looking component that provides an indication of future trends in the soundness of the bank. | |||||||||||||||||||||
| EC3 | The supervisor assesses banks’ and banking groups’ compliance with prudential regulations and other legal requirements. | |||||||||||||||||||||
| Description and findings re EC3 | The BL provides an appropriate framework for the BRSA to conduct compliance inspection in banks as part of its regular inspection activities. These inspections include compliance with the BL, sub-regulations issued by the BRSA and other regulations applied to banks, including anti-money laundering. The BRSA utilizes a number of tools to assess compliance of banks and banking groups with prudential and other requirements. As described in EC1, on-site supervisors conduct several compliance inspections during the complementary analysis phase of the supervisory cycle. Additionally, the rating process also involves the analysis of banks compliance with regulation and prescribed best practices. Finally, the off-site department generates monthly reports to confirm banks’ consolidated and non-consolidated compliance with prudential regulations and other legal requirements. There is an off-site reporting template supporting a legal requirements check list. When a breach is detected, the BRSA takes necessary actions including demand the correction and applying penalties. | |||||||||||||||||||||
| EC4 | The supervisor takes the macroeconomic environment into account in its risk assessment of banks and banking groups. The supervisor also takes into account cross-sectoral developments, for example in non-bank financial institutions, through frequent contact with their regulators. | |||||||||||||||||||||
| Description and findings re EC4 | The BRSA develops macroeconomic analysis that includes local and global conditions that might affect the banking system. These analyses are inputs for bank inspections. According to Supervisory Manual for Identifying Risky Areas and Supervision Planning (SMIRASP), inspection teams are expected to examine the diversity and scope of the bank’s activities and products, risk appetite, place in the sector, growth plan and strategies. They are also expected to understand the corporate culture of the bank and to have an opinion about the bank’s financial soundness and risk profile on a consolidated basis. While forming this opinion, the latest developments affecting all the institutions belonging to the group and its major shareholders, including non-bank activities, should be considered in conjunction with the latest trends and general macroeconomic conditions. As part of the off-site monitoring function, the BRSA develops reports regarding the banks’ derivative transactions, CDS spreads, equity prices, that are used by supervision staff and senior management. Depending on market developments and risk factors, specific analysis and reports are also prepared. The macroeconomic environment is also considered in stress testing studies. Top down macro stress testing studies employ a baseline and an adverse scenario and try to estimate how banks and the industry will be affected within a two years’ time frame. Macro variables such as GDP growth, FX rates, interest rates and unemployment rates in alternative scenarios are modeled and related with banks financial structure in terms of credit risk, interest rate risk, exchange rate risk and contagion risk. These analyses help to take account of the macroeconomic environment in both bank supervision and systemic risk analysis. Regarding cross-sectoral developments, the rating process includes a section called consolidated supervision containing questions that aims to evaluate relationship among the bank and other financial and non-financial entities of the group. Additionally, some specific reports are prepared by off-site supervision in order to assess the banking sector as a whole. As mentioned in EC1, the rating process analyses are limited by its own nature. BRSA also participates in a number of committees and working arrangements that allow the collaboration among different financial market supervisors (see CP 1 and 3 for details). In particular, BRSA, Treasury and CMB meet annually to share their findings and concerns and coordinate the supervision efforts toward insurance firms, investment firms, pension fund firms and others which are affiliated with banks. | |||||||||||||||||||||
| EC5 | The supervisor, in conjunction with other relevant authorities, identifies monitors and assesses the build-up of risks, trends and concentrations within and across the banking system as a whole. This includes, among other things, banks’ problem assets and sources of liquidity (such as domestic and foreign currency funding conditions, and costs). The supervisor incorporates this analysis into its assessment of banks and banking groups and addresses proactively any serious threat to the stability of the banking system. The supervisor communicates any significant trends or emerging risks identified to banks and to other relevant authorities with responsibilities for financial system stability. | |||||||||||||||||||||
| Description and findings re EC5 | The BRSA requires banks to submit information on a number of issues and converts them in a meaningful database for analyzing the financial system. Concentrations and trends are monitored through reports generated from this database. The BRSA off-site supervision function monitors and assesses asset quality, profitability, capital adequacy and liquidity of the individual banks and banking system as a whole by means of periodic reports such as: Bank Surveillance Reports, Weekly Banking Sector Report, Potential Non-Performing Loans Report, Monthly Key Indicators Report, Banking Sector Outlook, Stress Test Report, Country Risk Report, Credit Bureau Individual Credit Rating Results Report, etc. In addition to periodic reports, ad-hoc analysis about emerging risks and tendencies facing the banking sector are also prepared. It was mention, as an example, that because of the size of the open positions of the corporations, FX lending was a potential emerging risk factor for the sector. In the second half of 2015 a survey was conducted on FX loans which covered 2,527 biggest firms (71 % of total FX loans) and gathered information about FX assets, liabilities, income generation capacity and derivatives for hedging FX risks. BRSA findings are discussed in a number of committees with other authorities. Particularly relevant are the FSC and FSEC. See CP 1 and 3 for additional information. | |||||||||||||||||||||
| EC6 | Drawing on information provided by the bank and other national supervisors, the supervisor, in conjunction with the resolution authority, assesses the bank’s resolvability where appropriate, having regard to the bank’s risk profile and systemic importance. When bank-specific barriers to orderly resolution are identified, the supervisor requires, where necessary, banks to adopt appropriate measures, such as changes to business strategies, managerial, operational and ownership structures, and internal procedures. Any such measures take into account their effect on the soundness and stability of ongoing business. | |||||||||||||||||||||
| Description and findings re EC6 | According to the BL, the two authorities with roles in bank resolution are the BRSA and the SDIF. They regularly meet to exchange information and discuss measures and policies about banks (please refer to CP3). Additionally, BRSA and SDIF are the members of FSC and FSEC which are formed to increase the coordination, cooperation and information sharing among these institutions. Under the current legislative framework, resolution options and tools are evaluated when the bank is asked to take corrective actions. These options are analyzed taking into account high level considerations such as safeguarding confidence and financial stability, prevailing market conditions and cost-effectiveness of resolution. The BRSA and the SDIF have established a joint working group to analyze the eventual need to change the current resolution regime and align it with FSB’s Key Attributes of Effective Resolution Regimes. As part of this process, the two institutions have agreed to include resolvability assessment into the legislation. The joint working group is still formulating policy proposals and necessary legislative amendments on these issues. For the time being, banks are not required to develop recovery plans and supervisors have not started to assess banks’ resolvability. | |||||||||||||||||||||
| EC7 | The supervisor has a clear framework or process for handling banks in times of stress, such that any decisions to require or undertake recovery or resolution actions are made in a timely manner. | |||||||||||||||||||||
| Description and findings re EC7 | The BRSA has the authority to take an appropriate range of remedial actions which are stated in the Articles of 68, 69 and 70 of BL. The range of measures is broad and allows appropriate escalation according to the situation (see CP 1 for detailed description). Supervisory procedures are also intensified when banks are under stress. The frequency of inspections increase with the deterioration of the rating of the bank and the number of topics covered in the inspections may also increase due to the number of meaningful weaknesses identified (see details in EC1). When the BRSA decides to initiate the resolution, the process involves either the revocation of the bank’s operating permission (Article 106 BL) or the transfer of the management and control of the bank to the SDIF (Article 107 BL). The decision about the process is based on general considerations, such as the structure of the balance sheet, the amount of deposits and potential wider impact of the different options. After the bank is transferred to the SDIF, the SDIF decides which actions to take in line with its mandate and powers specified in the BL. If the bank is resolved under Article 106, the operating license of the failed bank is revoked and the SDIF makes a pay-out to the insured depositors and apply to the courts for a decision as to whether a bankruptcy proceeding should be initiated for the remainder of the failed bank. If the court rejects the application, the SDIF may start liquidation proceedings through a decision of the SDIF Board. In cases where the BRSA transfers management and control of a bank to the SDIF, the SDIF has wide powers under Article 107 of BL, including to suspend the activities of the bank and manage it, transfer assets and liabilities, take over its shares and restructure it, sell or merge it with another bank, and request the BRSA to revoke the operating license of the bank. The SDIF may also provide financial support to a failing bank if it has acquired all or the majority of its shares. One issue that should be considered in the effectiveness of the framework is that the sharing of communication responsibilities between the audit and the enforcement departments seems to generate a fragmented process that increases the risks that the messages conveyed to the bank do not reflect appropriately supervisory concerns. The speed of actions and decisions might also be affected. Please refer to CP9. As explained in EC6, authorities are studying changes in the current resolution framework to harmonize it with the FSB’s Key Attributes of Effective Resolution Regimes. | |||||||||||||||||||||
| EC8 | Where the supervisor becomes aware of bank-like activities being performed fully or partially outside the regulatory perimeter, the supervisor takes appropriate steps to draw the matter to the attention of the responsible authority. Where the supervisor becomes aware of banks restructuring their activities to avoid the regulatory perimeter, the supervisor takes appropriate steps to address this. | |||||||||||||||||||||
| Description and findings re EC8 | Bank-like activities without the authorization of BRSA are legally punishable. BRSA initiates investigations in case of file of complaints or information provided on potentially bank-like activities being performed without required permission. If needed, findings are submitted to the responsible authority for further proper legal actions, including reporting to the prosecutor’s office. The restructuring of a bank that involves establishing a subsidiary or investing in a joint venture requires a prior approval by the BRSA, where the bank needs to provide detailed information regarding structures and activities of the new undertaking. The BRSA explains it would not approve the application if it results in avoidance of the regulatory perimeter. Furthermore, the BRSA receives call reports on the structured of the banking groups and analyze group structure issues during on-site inspections. | |||||||||||||||||||||
| Assessment of Principle 8 | Materially Non-compliant | |||||||||||||||||||||
| Comments | The BRSA has an established and comprehensive methodology to supervise banks. This methodology is documented on a number of manuals and grounded on comprehensive databases and a broadly appropriate regulatory framework. Nevertheless, the practical implementation of the process is subject to shortcomings that needs to be addressed:
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| Principle 9 | Supervisory techniques and tools. The supervisor uses an appropriate range of techniques and tools to implement the supervisory approach and deploys supervisory resources on a proportionate basis, taking into account the risk profile and systemic importance of banks. | |||||||||||||||||||||
| Essential criteria | ||||||||||||||||||||||
| EC1 | The supervisor employs an appropriate mix of on-site18 and off-site19 supervision to evaluate the condition of banks and banking groups, their risk profile, internal control environment and the corrective measures necessary to address supervisory concerns. The specific mix between on-site and off-site supervision may be determined by the particular conditions and circumstances of the country and the bank. The supervisor regularly assesses the quality, effectiveness and integration of its on-site and off-site functions, and amends its approach, as needed. | |||||||||||||||||||||
| Description and findings re EC1 | The principles and procedures for the supervision of the institutions under the scope of the BRSA are determined by RAA. More specifically, article 5 of the RAA defines that the BRSA will conduct risk focus supervision (RFS). The RFS approach aims to shape the scope and intensity of the supervision taking into consideration the risk profile and the existence and adequacy of internal controls and risk management systems of banks. The BRSA’s supervision system is composed of two essential activities, on-site and off-site supervision which aims to complement and support each other. On-site supervision On-site supervision covers issues that might have an impact on the financial safety and soundness of the bank, including a comprehensive risk assessment of the bank to identify its risk profile. On-site supervisors frequently perform: i) comprehensive reviews of the loan portfolio and the adequacy and effectiveness of the internal control systems; ii) evaluation of the compliance of the financial statements and accounts with national and international accounting standards; iii) assessment and analysis of the consolidated group; iv) analysis of the adequacy and reliability of the information systems of the bank; and v) alignment of the operations of the bank with all relevant legislation, among other activities. Bank’s inherent risks are analyzed taking into account its risk management framework as well as its compliance with corporate governance principles. Corrective measures are recommended when problems are identified. See CP8 for detailed discussion on the supervisory cycle | |||||||||||||||||||||