Risk Management: Garanti Bank


Garanti Bank is a financial institution operating in the Turkish economy. It is subjected to various factors that, in essence, affect its operations and performance within the economy. Some of these factors are advantageous, while others present challenges that are viewed as risks by the bank. Some of these risks are particular to Garanti Bank while others affect the entire banking industry. The established Risk Management Department, therefore, performs a critical function in the identification and analysis of risks the bank faces in particular financial periods. It also relates them to prevailing assessments by the banking industry and seeks to address these risks appropriately.

This ensures that the risk levels are minimized or eliminated where possible, increasing the chances of the Bank making higher profits. This report seeks to look at the risks that Garanti Bank faced for the financial year 2010, and gives a comparison of the same with regard to previous years and the Bank’s Risk Policy. Moreover, it also seeks to compare these risks with those that are general for the banking industry.

Risk Identified

The 2010 financial period falls within the stabilizing period that came after the great global recession that began in late 2007. The levels and nature of risks that prevailed were of significance since they pointed out the degree of responsiveness of the bank towards them, and enabled the building of foresight of projections. They also enhance the explanation of the financial reports and why they varied from those of previous periods- increase in the profit levels for 2010 as compared to 2009 for instance.

The risks identified by the Risk Management department of Garanti Bank ranged from those that were operational- with respect to day-to-day transactions- to those that were out of the company’s control. Market and trading risks for example focused entirely on the general performance of the bank; with respect to globally accepted risk checking measures. Risks associated with trade also affect the Bank in a number of ways. These risks are a result of constantly changing market prices with respect to the Bank’s financial position as it gets involved in the trading activities and the shareholders’ worth for every period.

Delay in maturity and or early maturity of some short-term and long-term assets and liabilities also pose a structural risk, to the interest rates of the same. This is especially because financial reporting may not necessarily fall within same periods as those of maturity, and therefore may be subject to interference by prevailing factors. Liquidity risks are another type that the bank faces. These are associated with its ability to liquefy its assets and to respond to requirements to deal with liquidity difficulties whenever such an event occurred. Since liquidity deals with cash issues, its handling is critical.

Credit risks are also important to address, and they form a major area that requires the Bank’s focus. This is because it deals with the dangers associated with money lending, a pivotal aspect of financial institutions. Individual and commercial loans issued by the bank carry with them a certain degree of risk with regard to default in payment. This could be due to such factors as death or bankruptcy of the recipients as well as incapacitation and imprisonment. As a business, the bank also faces operational risks. Such risks are either internal or external, depending on the matter they affect and how they are to be treated by the Bank. These risks are related to the day-to-day performance of activities by the bank and members of its staff on its behalf.

Measures to Address the Risks

Garanti Bank’s Risk Management Department plays an important role in ensuring that its risks are kept at the lowest possible levels, to shield them from their effects should those risks occur. The Bank’s Risk policy as concerns these risks provides for careful understanding of the operational environment of its various branches. Careful study and analysis of the market risks for instance put the Bank at an advantage when it comes to dealing with them when they occur. It also provides the approaches to be adopted and implemented by the company to ensure that chances of them occurring are kept low. In addition, it provides for the need to conform and comply with international standards of dealing with risks.

As for structural interest rate risks, Garanti bank has had to adjust to the responsive Turkish economic environment for 2010. The generally positive outlook of that economy in response to the economic depression suffered earlier in the previous periods spurred growth that had an impact on the prevailing lending and borrowing rates. In addition, the strengthening of the local currency and emergence from the global crisis encouraged borrowing in the economy. This is because of the stimulus nature of the money structures in the economy as depicted by the low rates of borrowing.

Treatment of the liquidity risk is such that mechanisms put in place by the Asset- Liability Management department and the Asset and Liabilities Committee have been effective. Effective observance of these assets and liabilities with respect to assessing their liquidation and the effect of the move has helped control risks associated with the same. The daily handling and treatment of cash has also been improved, further ensuring that this critical component of liquidation is given careful consideration and treatment.

Proper mechanisms were responsible for the reduced risks associated with credit for 2010. For instance, the vibrant response by the economy to financial loan instruments both private and corporate suggested possibilities of increased risks due to lending by the banks in the sector. However, the impressive growth of the Turkish economy reflects increased activities, which can be a basis for the elimination of the possibility of defaults and losses because of the same.

Measures of Risk

The bank calculates Trading Risk using the Value at Risk model. The simulation is done using data collected over 260 days. The applicable confidence level is 99%. The value for 2010 was TL82.6 million. The average for the banking sector stood at TL73.1million. This indicates that Garanti Bank is doing slightly better than the industry at large.

The asset-liability management department manages liquidity risk. They use cash flow models and cash management models to ensure the bank has sufficient liquidity. Credit risk on the other hand is managed using the internal risk rating model. The company adheres to the Base II guidelines.

Summary- Implication of the Measures

The profit levels for Garanti Bank for 2010 grew by 6% from 2009, and this is attributed to the economy’s persistent emergence from the turmoil of the preceding periods. However, for the Bank, efforts to cut on risks through effective management structures and procedures as well as adoption of policies that aim at the same also contributed greatly to this effect. The overall risk in relation to the Bank’s net profit or loss rating fell by 1.45 compared to 2009, posting 2.96%. The net profit for the company also increased form 83325 lira in 2009 to 206168 Lira in 2010, with the consideration of the risk levels for the period relative to the financial activities for the same. Analysis of this bank’s risk management shows the importance of the exercise to the institution.

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