YK Stress Testing

UPGRADE TEMPLATES MY DESIGNS MY BRAND HELP ACCOUNT
! Alignment 100% *# & )

$(%' + STRES TESTING_new , Last Saved: 1:01am
PUBLISH SHARE DOWNLOAD SETTINGS
"
1
of 12
STRESS
!
TESTING
2020
1
! Alignment 100% ,' # $

(%&) + STRES TESTING_new * Last Saved: 1:01am
"
2
of 12
!
Table Of Contents
Introduction to stress testing
Currency risk
Financial Statements
Scenarios
Commentary
Sources
2
! Alignment 100% ,& * +

$'%# ( STRES TESTING_new ) Last Saved: 1:01am
"
3

of 12

Currency risk What is Stress Testing?
Financial Statements Stress tests measure capital adequacy of banks to withstand a negative economic shock by conducting hypothetical
! scenarios such as recessions, falling house prices, rising employment and market crushes. Regulatory bodies require banks to
Scenarios undergo stress test conducted by the Central Bank and their own risk management teams. The models used in stress testing
demonstrates the effects of adverse financial market and macroeconomic scenarios on banks' balance sheets and profitability. Bank
Commentary stress test started to be essential after the 2007-2009 Global financial crisis when financial institutions revealed how
undercapitalization make them vulnerable to negative economic shocks and therefore regulatory bodies started to require
Sources
more financial reporting from the banks. Banks are required to document their capital reserves, capital management strategies
and solvency to the regulatory bodies. Stress tests are conducted in market risk, credit risk, liquidity risk to determine how
financially healthy a bank is to endure a possible crisis. Fed as well as ECB require stress testing of the banks, with ECB requiring
70% of banking institutions across Eurozone.
If banks cannot pass the stress tests they go through, regulations require them to rebuild their capital reserves by
cutting their share buybacks and dividend payouts so that "run on banks" is prevented by decreasing the default
probability of undercapitalized banks. However, some banks can get a "conditional pass" on the stress tests to protect
their share prices from falling due to cutting of the dividends by being granted some time to rebuild the reserves required.
Examples From Around the World

IMF, US Federal Reserve, Bank of England, EBA and Bank of Japan are some institutions who produced their stress
testing frameworks for regulatory bodies in relevant countries. IMF's stress test model is executed under Financial Sector
Assessment Program (FSAP) and measures financial stability of the institutions. It includes the most important 2-3 macrofinancial
shocks to the economy of the relevant country which can be applied to banks, insurance and money market fund sectors. For the EU
countries’ stress testing, EBA conducts its test across banks that make up more than EU banking sector assets. The scenarios EBA
considers are developed by ECB and European Systemic Risk Board considering the threats to EU financial sector. Contrary to its
advance counterparts in the world the stress test conducted by Bank of Japan is not to set capital requirements but for risk
identification and communication purposes. It conducts a top-down macro test with more than 350 banks to assess economic and
financial risks. When we look at the US Federal Reserve's stress testing approach however, it uses a dynamic balance sheet approach
contrary to EBA stress test in Europe that allows US banks to evolve in the time horizon. The test of FED is for individual banks
and assesses the banks in its quantitive capabilities as well as qualitative ones and carries out severely adverse scenarios such as
unemployment at 10%.
3
! Alignment 100% (# & )

'*$% + STRES TESTING_new , Last Saved: 1:01am
"
Currency Risk
With the global integration of markets, banks have started to operate in many countries and use their currencies. As a result, banks have had to transact
4
of 12
in many different currencies. With the banks making significant profits from foreign currency, their interest in foreign currency increased. On the other
hand, foreign exchange activities also brought the risk. Thanks to foreign exchange transactions, a large amount of profit can be obtained and the same
amount of loss can be exposed.
Introduction to stress testing The foreign exchange market where the exchange rates are determined has a complex structure and there are many factors that determine the rate in the
market. Some of these factors are the monetary-fiscal policy and the exchange rate regime in the country, the expectations of foreign exchange market
Currency Risk actors and their power to affect the exchange rate, international money and capital flows, differences in interest, inflation and balance of payments
between countries, government policies and restrictions, and generally foreign exchange supply and demand. The change and diversification of these
factors over time and the volatility of the variables that affect these factors increase the uncertainty in exchange rates.
! Changes in exchange rates cause risks for banks. Unexpected exchange rate changes causing the possibility of
Scenarios loss in banks' assets/liabilities, income/expenses or cash flows in general are defined as currency risk (Greuning and
Bratanovic, 2009: 255-266). Currency risk mostly arises from unpredictable exchange rate changes. Since the necessary measures are taken by the
Commentary banks against the predicted exchange rate changes, these exchange rate changes do not have any risk-causing effects on the banks' value or cash flow
(Moosa, 2003: 65).
Sources
Turkey's currency risk
The negativity of the Covid-19 crisis in the global economy causes the currency of many countries to experience sharp losses in value against the dollar.
However, Turkey has been known with its volatile currency before pandemic.
Banking Crisis in 2001
Banks in Turkey lending of TL but collect deposits in foreign currency or give out loans in foreign currency but collecting deposits in TL brings
currency risk. During the, banks' collecting foreign currency deposits and lending in TL, due to the fixed exchange rate policy applied, increased their open
positions. However, the increase in credit utilization increased the current account deficit with imports, which led to a decrease in total foreign exchange
reserves. As a result of these developments, the fixed exchange rate policy became unsustainable and a floating exchange rate policy was adopted. With the
transition to the floating exchange rate policy, there were great increases in exchange rates. With the increase in exchange rates, banks in open positions
suffered a great loss and this situation resulted in the bankruptcy of many banks (Gültekin, 2001).
Currency Crisis in 2018
Turkey's economy in 2018 was overheating with rising inflation and current account deficit, on the other hand reduced hot money inflows due to the US
Federal Reserve's (Fed) rate hikes, Pastor Brunson crisis with the USA and the growing concerns of foreign investors regarding the independence of the
Central Bank (CBRT) caused the exchange rate had risen sharply from 4 to 7. These external and internal risk effecting TL very quickly since uncertainty in
markets is a run-away signal for investors.
A tweet from US president Donald Trump saying “Our relations with Turkey are not good at this time!” caused TL to lose % 22 value against dolar by
daily which made TL's loss against the dollar to reached 80 percent since the beginning of the 2018. This event shows that Turkish currency can be effected
from the external events and can lose huge values which doesn’t have any stabilization that also effect increase in uncertainty of Turkish Lira.
Currency Crisis in 2020
Since 2018, TL is having huge losses daily or monthly which deepened while Covid-19 spread all over the world while bringing new uncertainties. In
this period when economies are in a difficult situation due to coronavirus restrictions and demand for dollar increases and demand for risky
developing country assets decreases.
The wrong policies done by CBRT such as not raising the policy rate, contrary to the market expectations, had an effect on the depreciation of the
TL against the dollar. The depreciation of the Turkish lira against the dollar after CBRT’s wrong decisions caused it to be the currency with the
highest loss of value among developing countries in 2020. With one meeting of CBRT, TL can lose %1,5; with one tweet TL can lose %22. These
sharply changes due to country risk effect the bank’s stability in context of currency risk.
4
! Alignment 100% &, ( %

)'#$ * STRES TESTING_new + Last Saved: 1:01am
"
Currency Risk 5
of 12
Turkey's currency risk
Dollarization
Introduction to stress testing Another reason for banks' exposure to currency risk is local currency. With the increase in inflation in the country, the currency loses
its feature of being a value storage tool, moreover, it is not a stable and convertible currency, which is generally effective on exchange
Currency Risk rate risk (Gounopoulos vd., 2013: 272). With the loss of value of the local currency due to inflation, investors are turning to other stable
and convertible currencies where they can store the value of their currency instead of the local currency in order to prevent the
depreciation of their existing savings.
Financial Statements In general, dollarization refers to the unregulated process of preferring foreign currencies instead of the domestic currency in an economy,
! as a result of the financial decisions of its citizens. Residents of countries that have constantly depreciating currencies and high inflations
Scenarios have a tendency to deposit their savings in foreign currencies in order to protect their wealth. The high dollarization ratio over time has
shown remarkable declines from time to time; dollarization maintains its importance in today’s Turkey. For example, the ratio of foreign
currency deposits of resident in Turkey saw the historical peak of 58.4 percent in 6 October, 2020. This is also another sign that
Commentary increase the currency risk in banks’ balance sheet.
Sources
TL KURU 2018-2020 DOLLARIZATION
ARALIK GRAPHIC
Figure 1: Dolarizasyon Oranı. Adapted from "Dolarizasyon Yeniden Zirveye

Giderken" by Mahfi Eğilmez, 2020, retrived from
https://www.mahfiegilmez.com/2020/09/dolarizasyon-yeniden-zirveye-
giderken.html.
Considering the factors such as: Turkey as a emerging market without predictable political decisions; the economic crisis caused by pandemic;
external factors; high dollarization and inflation in Turkey's economy; political influence on CBRT decisions affected our decision to choose
currency risk in our stress test. As our concern, if bank have currency risk such as 2001 crisis, that will trigger the other risk such as credit risk.
If TL lose value much more than expected, people who borrow in foreign currency would not be able to pay their debt. The exchange rate risk of
country is not effecting just banks balance sheet in context of currency risk, also effecting the companies' financial situations of that country
which can trigger bank’ credit risk.
5
! Alignment 100% #' + ,

)$%( & STRES TESTING_new * Last Saved: 1:01am
"
Scenario Analysis 6
of 12
What to expect after 2020?
2020 has been the year of economic volatility and vulnerability. COVID-19 affected the Turkish economy through domestic
output, employment, and external channels.
Introduction to stress testing The unfortunate missteps taken by the CBRT has caused the inflation rates in Turkey to rise dramatically. We know
that when central banks lower interest rates, the demand for local currency declines since the rate of return from the
Currency Risk investment declines as well. Therefore, CBRT decreasing the interest rate caused demand for TL to go down and
investors started to search for alternative saving instruments rather than TL which increased the demand for dollars
Financial Statements and gold.
! When demand for dollars increased, the dollar appreciated against TL and that increased the debt burden of Turkish
Scenarios companies. During this situation CBRT used reserves to prevent further depreciation of TL, however, now the
depreciation of TL is inevitable since the reserves remain empty.
Commentary
Hence, we have concluded that for the given situation a more pessimistic approach would be appropriate for the case of
Sources Turkish banks, and therefore we assigned a bigger percentage to USD/TRY rate having a greater value than it has today
compared to it staying constant or decreasing.
As we can see the forecasts for 2021 for the USD/TRY exchange rate have been increasing,
putting banks into more and more possibility of currency risk.
Figure 2: Average USD/TRY Forecasts. Adapted from "US Dollar to Turkish Lira- Rate, Chart, Forecast, Analysis" by Take Profit, 2020,
retrieved from https://take-profit.org/en/forex-rates/usd/try/.
6
! Alignment 100% #( ' &

+),* $ STRES TESTING_new % Last Saved: 1:01am
"
Scenario Analysis 7
of 12
Our Expectations
By looking at the following table, which mostly consists of different banks’ assumptions about the 2021 USD/TRY rate we
Introduction to stress testing can assume that the exchange rate is expected to remain between the values [7.5,9] for the next year. We took the highest
value that we expect for the rate to be as 9 even though the table suggests 8.7 since the values used in the table were
Currency Risk estimated before 2020 Q4 was observed and the last three months of 2020 for Turkey suggested even more depreciation for
the upcoming year as the exchange rate went above 8 during these months indicating a more pessimistic scenario for the
Financial Statements upcoming year. Also, another factor that affected our decision-making process for the values of the exchange rate for the
! upcoming year has been the CBRT’s November update on the expectation survey in which the 12-month exchange rate for
Scenarios USD/TRY has increased from 8.31 to 8.41. Therefore we have concluded with giving the minimum and maximum values the
exchange rate higher values than it is suggested from the table as the expectations have increased since September which is
Commentary when the approximations were done.
Sources
Figure 3: USD/TRY Forecasts 2021-2022. Adapted from "US Dollar to Turkish Lira- Rate, Chart, Forecast, Analysis" by Take Profit,
2020, retrieved from https://take-profit.org/en/forex-rates/usd/try/.
7
! Alignment 100% ,# $ (
&'%) + STRES TESTING_new * Last Saved: 1:01am
"
Financial Statements 8
of 12

Currency Risk Assets and
liabilities
Financial Statements dependent on
! foreign currencies
Scenarios
Commentary
Sources
To calculate
currency risk more
properly, all foreign
assets and liabilities
were converted to
USD.
8
! Alignment 100% *$ ' &

#+%( ) STRES TESTING_new , Last Saved: 1:01am
"
Financial Statements 9
of 12

Currency Risk Simplified
Balance Sheet
Financial Statements to calculate
! Currency Risk
Scenarios
Commentary
Sources
9
! Alignment 100% &$ # ,

(%+' ) STRES TESTING_new * Last Saved: 1:01am
"
Scenarios 10
of 12
15% change is the assumption of parity change that may be faced by the Bank in case of
a currency shock.
Currency Risk The following table illustrates the sensitivity of the Bank to 15% change in currency
exchange rates (USD) regarding the Bank’s net assets (Assets-Liabilities)
!
Scenarios
Commentary
Sources
As it is seen, net assets would decrease by 9% in the case the exchange rate of USD
increased by 15%.
Bank’s Probability of Insolvency
It is assumed that Bank’s assets will
grow with the same proportion as the
previous year which is %21. Thus, the
predicted value of assets for the next
period is 566.996.143.
Bank fails when R <d + (df*x); 1 USD=

7,808 TL
R= 566.996.143, d= 170.328.723, df= 251.543.032 TL which is 32.216.064 USD
566.996.143 <170.328.723 + 32.216.064x; 396.667.420 < 32.216.064x 12,312 <x
So, the Bank fails if the USD exchange rate increases more than 12,312 TL.
10
! Alignment 100% &# ) ,

%+'$ ( STRES TESTING_new * Last Saved: 1:01am
" Commentary 11
of 12
Yapıkredi is the third largest privately-owned deposit bank and 6th largest bank overall ranked
Introduction to stress
OOC Chair’s testing
Message by its assets of ! 492.5 billion, as of Q3 2020. Therefore, the currency risk exposed by Yapıkredi
Currency Risk reflects the possible responses of the banking sector to a currency shock in general.
About the OCC
Financial Statements The outlook for Turkey's upcoming performance is expected to be negative by the rating agencies as
! The OCC’s Work in well as Yapıkredi currently. Therefore, TL/dollar exchange rate is expected to appreciate, which
Scenarios
increases the chances that the banks will be exposed to currency risks. Therefore, scenarios chosen in
2022
Commentary this stress test reflect the markets' expectations about the position of TL against the dollar.
Sources
Financial Statements The stress test on Yapıkredi was to determine the changes in the assets of the bank when Yapıkredi is
tested on the two scenarios: the exchange rate TL/dollar appreciates 15% and depreciates by 15%. The
Contact Us conclusion is that the assets of the bank would decrease by 9% due to a 15% appreciation while
they would increase by 9% due to 15% depreciation.
Assuming that Bank's assets would grow by 21%, as they did in the previous year, Yapıkredi
bank would be insolvent if TL/USD exceeds 12,312.
Although the exchange rate for the bank to be insolvent is above the pessimistic scenario expectations,
this stress test demonstrates how vulnerable one of the top privately-owned banks in an emerging
country to the a currency shock alone.
11
! Alignment 100% '$ , %

&+(# ) STRES TESTING_new * Last Saved: 1:01am
"
12
Sources
of 12
Introduction to stress
OOC Chair’s testing
Message
Currency Risk Greuning H.V., Bratanovic S.B., (2009), Analyzing Banking Risk: A Framework for
About the OCC
Financial Statements Assessing Corporate Governance and Financial Risk, World Bank Publications, Washington.
! The OCC’s Work in
Scenarios
Moosa I.A., (2003), International Financial Operations: Arbitrage, Hedging, Speculation,
2022
Commentary Financing and Investment, Palgrave Macmillan, New York.
Sources
Gültekin E., (2001) Risk Tabanlı Sermaye Modeli ve Türkiye Örneği. BDDK Yetki Etüdü
Contact Us Raporu, Ankara,
Gounopoulos D., Molyneux P., Staikouras S.K., Wilson J.O.S., Zhao G., (2013), “Exchange
Rate Risk and the Equity Performance of Financial Intermediaries”, International Review of
Financial Analysis, Sayı: 29.
USD/TRY RATE FORECASTS 2021 - 2022. (2020). [Table]. Take-Profit.Org. https://take-

profit.org/en/forex-rates/usd/try/
Egilmez, M. (2020). Dolarizasyon Yeniden Zirveye Giderken [Graph].

https://www.mahfiegilmez.com/2020/09/dolarizasyon-yeniden-zirveye-giderken.html
Dent , K., Westwood, B., & Segoviano, M. (2016, September 21). Stress testing of banks: an
introduction. Retrieved from Bank of England: https://www.bankofengland.co.uk/quarterly-
bulletin/2016/q3/stress-testing-of-banks-an-introduction
12

YK Stress Testing

Uploaded by

Copyright:

Available Formats

You might also like

YK Stress Testing

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

YK Stress Testing

Uploaded by

Copyright:

Available Formats

UPGRADE TEMPLATES MY DESIGNS MY BRAND HELP ACCOUNT

! Alignment 100% *# & )

! Alignment 100% ,' # $

! Alignment 100% ,& * +

Introduction to stress testing

Introduction to stress testing

Examples From Around the World

! Alignment 100% (# & )

Currency Crisis in 2018

Currency Crisis in 2020

! Alignment 100% &, ( %

Figure 1: Dolarizasyon Oranı. Adapted from "Dolarizasyon Yeniden Zirveye

! Alignment 100% #' + ,

! Alignment 100% #( ' &

Introduction to stress testing

! Alignment 100% *$ ' &

Introduction to stress testing

! Alignment 100% &$ # ,

Bank fails when R <d + (df*x); 1 USD=

! Alignment 100% &# ) ,

! Alignment 100% '$ , %

USD/TRY RATE FORECASTS 2021 - 2022. (2020). [Table]. Take-Profit.Org. https://take-

Egilmez, M. (2020). Dolarizasyon Yeniden Zirveye Giderken [Graph].

You might also like