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PART II BANKING REGULATION AND SUPERVISION AGENCY

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Title: PART II BANKING REGULATION AND SUPERVISION AGENCY


1
PART IIBANKING REGULATION AND SUPERVISION AGENCY
  • SWORN BANK AUDITORS
  • ON-SITE BANK SUPERVISION PROCEDURE
  • DR. SEDAT YETIM
  • MARCH 1, 2005

2
ON-SITE BANK SUPERVISION
  • Supervision Plan
  • Before On-site Supervision
  • During On-Site Supervision
  • After On-Site Supervision

3
ON-SITE BANK SUPERVISIONSupervision Plan
  • On-site supervision plan is made by the head of
    sworn bank auditors and the chairman of the
    agency.
  • When preparing the plan,
  • Previous on-site supervision results,
  • Off-site surveillance findings,
  • Findings of other departments of BRSA,
  • Comments and suggestions of other regulatory
    bodies (SEC, CBRT,) and departments of BRSA
  • Developments in the banking industry are taken
    into consideration.

4
ON-SITE BANK SUPERVISIONSupervision Plan
  • Each national bank receive a full-scope, on-site
    supervision at least once every 12 months.
  • Supervision plan contains
  • Banks (and other financial institutions like
    Islamic finance institutions) which will be
    supervised on-site
  • Priorities (which banks should be supervised
    first and intensively)

5
ON-SITE BANK SUPERVISIONSupervision Plan
  • After the supervision plan agreed upon, a
    supervision program is done by the head of sworn
    bank auditors depending on the plan.
  • Supervision program is prepared semi-annually or
    quarterly and approved by the chairman of the
    agency.
  • Supervision program contains assignment of banks
    to bank auditor teams.

6
ON-SITE BANK SUPERVISIONSupervision Plan
  • After the approval of chairman, the supervision
    program is handed out to bank auditors.
  • Each auditor declares the beginning date of
    examination.

7
ON-SITE BANK SUPERVISIONBefore Supervision
  • As soon as bank auditors take the supervision
    program, they review
  • the previous on-site supervision reports,
  • off-site surveillance findings,
  • comments of other departments
  • of assigned bank(s), which are kept in the bank
    files of sworn bank auditors and other
    departments.

8
ON-SITE BANK SUPERVISIONDuring Supervision
  • After reviewing necessary information, a meeting
    is arranged with the GM and BoD of the assigned
    bank.
  • During this meeting,
  • Purpose and the scope of the examination is
    communicated clearly to bank,
  • Bank auditors ask for cooperation during
    examination.

9
ON-SITE BANK SUPERVISIONDuring Supervision
  • The examination plan is developed by bank
    auditors before starting examination.
  • Planning includes assessment of banks current
    and future risks arising from existing and
    planned activities.
  • Examination activities are based on supervisory
    strategies developed in planning process.
  • Supervisory strategies are updated frequently
    based on developments in banks activities,
    banking industry, general economic conditions and
    regulations.

10
ON-SITE BANK SUPERVISIONDuring Supervision
  • Examination areas to be focused on are determined
    based on supervisory strategies, including major
    branches daily operations.
  • Core assessment and risk assessment is conducted
    in each examination area based on supervisory
    manuals.
  • Risk assessment procedure is added to supervisory
    process of sworn bank auditors as a last
    development.
  • The quantity of risk and quality of risk
    management related to each examination area are
    evaluated during examination.

11
ON-SITE BANK SUPERVISIONDuring Supervision
  • Sworn Bank Auditors asses the following factors
    during examination as a minimum standard.
  • Capital Adequacy
  • Asset Quality
  • Management
  • Earnings
  • Liquidity
  • Sensitivity to market conditions
  • Off-balance sheet activities

12
ON-SITE BANK SUPERVISIONDuring Supervision
  • CAPITAL ADEQUACY To evaluate the banks capital
    level, following areas are examined by the bank
    auditors.
  • The level and the quality of capital and the
    overall financial condition of the bank
  • Determine whether the bank complies with the
    legal capital adequacy rules.
  • Banks should maintain a capital level computed
    according to the credit risk and market risk
    (interest rate risk, price risk and exchange rate
    risk) levels.
  • Whether the bank uses standard method or model
    method to compute capital adequacy ratio (8).
  • If the bank uses model method, bank auditors
    check the model assumptions and back testing
    results.

13
ON-SITE BANK SUPERVISIONDuring Supervision
  • Determine whether the bank complies with the
    legal rules regarding capital level other than
    capital adequacy ratio (Banks Act, articles 9/6/a
    ve 7/2 and Foreign Currency Position-Capital
    Ratio Regulation)
  • Examine the composition of capital base (e.g.
    amount of tier 1 and tier 2 capital)
  • Evaluate the ability of management and owners to
    adress emerging needs for additional capital
  • Evaluate the ownership structure of the bank

14
ON-SITE BANK SUPERVISIONDuring Supervision
  • ASSET QUALITY To assess the asset quality of the
    bank following areas are examined.
  • The adequacy of credit administration procedures
    and appropriateness of risk identification
    systems
  • The level, distribution, severity and trend of
    problem, non-accrual, restructured and
    nonperforming assets.
  • The adequacy of the allowance for loan losses and
    other asset valuation reserves.
  • The diversification and quality of the loan
    portfolio

15
ON-SITE BANK SUPERVISIONDuring Supervision
  • The existence of asset concentration
  • The ability of management to properly administer
    its assets including timely identification and
    classification of problem assets
  • The adequacy of internal control and management
    information systems
  • The credit risk arising from off-balance-sheet
    transactions
  • The first 100 loans or 70 of all loans,
    whichever is larger, are examined one by one
    during examination

16
ON-SITE BANK SUPERVISIONDuring Supervision
  • MANAGEMENT To assess the quality of the bank
    management following areas are examined.
  • The level and quality of oversight and support of
    all bank activities by the board of directors and
    management,
  • The ability of the board of directors and
    management, to plan for and respond to risks that
    may arise from changing business conditions or
    introducing new activities or products,
  • The adequacy of appropriate internal policies and
    controls addressing the operations and risks of
    significant activities,

17
ON-SITE BANK SUPERVISIONDuring Supervision
  • The accuracy, timeliness and effectiveness of
    management information and risk-monitoring
    systems appropriate for the banks size,
    complexity and risk profile,
  • The adequacy of audits and internal control to
    maintain effective operations and reliable
    financial and regulatory reporting,
  • Compliance with laws and regulations
  • Responsiveness to recommendations from auditors
    and supervisory authorities,

18
ON-SITE BANK SUPERVISIONDuring Supervision
  • Management depth and succession,
  • The extent to which the board of directors and
    management is affected by a dominant influence or
    authority,
  • Willingness to serve the legitimate banking needs
    of the general economy.

19
ON-SITE BANK SUPERVISIONDuring Supervision
  • EARNINGS To assess performance of earnings,
    following areas are examined.
  • The level of earnings, trends and stability of
    earnings,
  • The ability to provide for adequate capital
    through retained earnings,
  • The quality and sources of earnings,
  • The level of expenses in relation to operations,
  • The adequacy of the budgeting systems and
    management information systems in general,

20
ON-SITE BANK SUPERVISIONDuring Supervision
  • The adequacy of provisions for loan losses and
    other valuation allowance accounts,
  • Dividend policy of the bank.

21
ON-SITE BANK SUPERVISIONDuring Supervision
  • LIQUIDITY To assess the adequacy of the banks
    liquidity, following areas are examined.
  • The adequacy of liquidity sources compared with
    present and future needs and the ability of the
    bank to meet liquidity needs without affecting
    adversely its condition,
  • The availability of assets readily convertible to
    cash without loss,
  • Access to money markets and other sources of
    funding,
  • The level of diversification of funding sources,
  • The degree of reliance on short-term, volatile
    sources of fund,

22
ON-SITE BANK SUPERVISIONDuring Supervision
  • The trend and stability of deposits,
  • The capability of management to properly
    identify, define, measure, asses, monitor and
    control and report the banks liquidity position.

23
ON-SITE BANK SUPERVISIONDuring Supervision
  • SENSITIVITY TO MARKET CONDITIONS To assess
    sensitivity of banks to market conditions
    following areas are examined.
  • The sensitivity of the banks earnings or the
    economic value of its capital to adverse changes
    in interest rate, prices and exchange rates,
  • The ability of management to identify, measure,
    monitor and control exposure to market risk.

24
ON-SITE BANK SUPERVISIONDuring Supervision
  • After examination is completed, an exit meeting
    with BOD and general managers of the bank is
    arranged.
  • During the exit meeting, examination results are
    communicated to banks officials and their
    comments are taken into consideration in the
    preparation of examination report.

25
ON-SITE BANK SUPERVISIONDuring Supervision
  • After examination is completed, two types of
    report are prepared
  • Soundness and safety report which states whether
    the bank is operating in a sound and safe manner.
  • Compliance report which states whether the bank
    complies with the regulations.

26
ON-SITE BANK SUPERVISIONAfter Supervision
  • After examination reports are prepared, they are
    submitted to Institutions Department for
    enforcement.
  • Institutions Department sends the reports to the
    bank formally and the bank sends back its
    comments on reports to Institutions Department in
    a written format.
  • The Banks comments on the reports are sent to
    bank auditors who prepare these reports.
  • After the bank auditors communicate their
    responses to Institutions Department, on-site
    supervision is completed.

27
ON-SITE BANK SUPERVISION
  • THE REPORTS PREPARED by SBAs in 2003 and 2004
  • Report Title Number of Report
    2003-2004
  • Safety and Soundness Report 60-46
  • Compliance Report 95-90
  • Other Report 45-62

28
ON-SITE BANK SUPERVISION
  • Developments in on-site examination procedure
  • A new project has been started to make on-site
    examination procedure more effective and timely,
  • A new software will be designed using the latest
    technological improvements and is planned to be
    used in examination procedure in 2005,
  • Risk Based Supervision project is about to
    finalize.
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