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Risk Management Objectives and Principles Liquidity Risk

TBC Bank operates a strong and independent, business minded risk Liquidity risk is inherent in banking operations. Both funding and
management system. Its main objective is to contribute to the market liquidity risks can emerge from a number of factors which
sustainability of risk adjusted returns through implementation of an are beyond TBC’s control. Due to financial market instability,
efficient risk management system. Four major principles in the factors such as a downgrade in credit ratings or other negative
course of risk management have been adopted to enable the developments can affect the price or ability to access funding
accomplishment of major objectives: necessary to make payments in respect of the Bank’s future
• Govern risks in a transparent manner to obtain understanding indebtedness.
and trust. Consistency and transparency in risk related
processes and policies represent preconditions for gaining trust Market Risk
from various stakeholders. The communication of risk goals and TBC Bank does not operate a trading book. Thus, its exposure to
strategic priorities to governing bodies and the provision of a market risk comprises foreign exchange risk and interest rate risk
comprehensive follow-up in an accountable manner are key in the banking book. Accordingly TBC’s only exposure to market risk
priorities for risk staff. is foreign exchange risk in its “structural book”, comprising its
• Promote sustainable growth and TBC Bank’s resiliency through regular commercial banking activities having no trading, arbitrage
prudent risk management. Risk management represents a or speculative intent. Due to high dollarisation of the economy in
backstop against excessive risk-taking. Capital adequacy Georgia, movements in foreign exchange rates, can adverse effect
management and strong forward-looking tools and decision- TBC’s financial position.
making ensure TBC Bank’s sustainability and resiliency.
• Ensure that risk management is an enabler of TBC Bank’s Interest Rate Risk
strategy. Risk staff provide assurance on the feasibility of the Arises from potential changes in market interest rates that can
achievement of objectives through risk identification and adversely affect the value of TBC’s financial assets and liabilities.
management. Identification and the adequate pricing of risks, as This risk can arise from maturity mismatches of assets and
well as risk mitigation actions, help generate desired returns and liabilities, as well as from the repricing characteristics of such
achieve planned targets. assets and liabilities.
• Ensure that risk management represents a competitive
advantage for TBC Bank. Comprehensive, transparent and Operational Risk
prudent risk governance facilitates understanding and trust Operational risk is the risk of loss resulting from inadequate or
from multiple stakeholders and ensures the sustainability and failed processes, people and systems or from external events. It
resiliency of the business model and the positioning of risk includes legal risk, but excludes strategic and reputational risk.
management as TBC Bank’s competitive advantage and
strategic enabler. Reputational Risk
Reputational risk is the possible loss of the organisation’s
Key Risks reputational capital resulting in decline of the organisation’s overall
The key risks faced by TBC Bank include credit risk, liquidity and value and/or increased regulatory or other costs. It includes
market risks (including interest rate risk and foreign currency risk) adverse events related to ethics, safety, security, sustainability,
and operational risk. Moreover, strategic, reputational and quality, and innovation.
compliance risks are also recognised.
Strategic Risk
Credit risk Changes in market conditions, customer behaviour, and technology
As a provider of banking services, TBC Bank is exposed to risk of may all negatively impact the Bank’s results if adaptability to the
losses due to the failure of a customer or counterparty to meet its environment is compromised. Respectively the Bank is exposed to
obligations to settle outstanding amounts in accordance with agreed strategic risk.
terms. Credit risk is the most material risk faced by the Bank as long
as it is engaged mainly in traditional lending activity with a simple Compliance Risk
balance sheet. Due to high dollarisation of the economy, currency The Bank is exposed to compliance risk given that it is governed by
induced credit risk is one of the significant components of credit risk, local regulations as well as creditor covenants.
which relates to risks arising from foreign currency-denominated
loans to un-hedged borrowers in the Bank’s portfolio. Credit risk also
includes concentration risk, which is the risk related to credit portfolio
quality deterioration due to large exposures provided to single
borrowers or groups of connected borrowers, or loan concentration in
certain economic industries.

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Key Focus in 2015

2015 was a significant year for the risk management function of TBC Bank as the economy was affected by adverse external developments.
The currency depreciated by approximately 30% resulting in debt burden appreciation of the largely dollarised customer base. As a result
the Bank’s risk management tools and techniques were utilised at their maximum capacity, managing credit risk in a proactive manner and
helping to minimise the impact of adverse developments on the Bank’s risk profile and profitability. Key focus activities are summarised
below.

Intense Portfolio Monitoring • In response to local currency devaluation, the Bank undertook scrutinised monitoring of the
loan book both on a transaction and portfolio level. As a result of this monitoring process,
individual borrowers affected by currency devaluation were identified and specific action
plans were outlined; vulnerable products and industries were identified with underwriting
criteria being revised accordingly. This approach enabled the Bank to keep credit risks
within acceptable limits despite an unstable macro environment.
Proactive Restructuring Offered • The Bank offered restructuring to borrowers with foreign currency denominated exposures
to FX Borrowers Weakened by which were affected by the currency depreciation. The purpose of this restructuring process
GEL Depreciation was to enable customers with increased debt burden to meet their credit obligations. Either
loan maturity lengthening or conversion to local currency options was exercised by
borrowers. Restructuring packages were tailor made to individual borrower needs
especially in case of large borrowers.
NPL and LLP Methodology Updates • The Bank updated its NPL methodology to harmonise it with international best practice so
that it appropriately reflects portfolio quality, also resulting in better comparability of TBC’s
NPL ratio with that of peers. In past years TBC Bank disclosed the share of 90 days past due
and restructured loans in the total portfolio. From December 2015, TBC Bank applied an
updated definition of Non-Performing Loans which incorporates loans with principal or
interest overdue by more than 90 days and those with identified underlying well-defined
weaknesses regardless of the amount or days in arrears. The Management believes that
the updated definition results in a more accurate and sound classification of non-
performing exposures.
• As of 31 December 2015, TBC Bank reports (IFRS) loan loss provisions based on a revised
methodology. The methodology was developed in 2015 with the support of Deloitte. It
increased the sophistication of assessment of impairment allowances resulting in enhanced
accuracy. In particular, more granular segmentation of the portfolio was undertaken and
various sophisticated risk parameters were applied for a more comprehensive assessment
of losses. TBC Bank has also enhanced its assessment methodology for individually
“significant” borrowers through the introduction of a scenario analysis. The updated
provisioning methodology did not result in a material impact on the overall impairment
allowances of the Bank. For more details, please refer to Note 9 of Audited Financial
Statements of TBC Group.
Structural & Functional Review in 2015 • The Bank is focused on continuous enhancement of its risk management practices in line
with industry best practices adopted internationally. As a result the Bank undertook a
comprehensive structural and functional review of risk management in 2015. The four
month comprehensive review was supported by leading risk management consulting firm
Oliver Wyman.
• The Bank validated its current practice efficiency and established risk strategic priorities
across a three-year time horizon. Implementation of key priorities are aimed at promoting
prudent and informed risk-taking, risk analysis sophistication advancements, modelling
and validation capabilities further development, increasing process automation, etc.
• The Enterprise Risk Management (ERM) team was mandated with the responsibility to
coordinate the implementation of strategic projects.

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Updated Organisational Structure • All risk management functions were consolidated under a centralised risk management
and Team umbrella. The resulting organisational structure is sufficient to serve the current scale of
Bank activities as well as future strategic developments.
• An ERM function in charge of cross-risk analytics was established, driving the risk appetite
framework as well as accomplishment of the risk strategy.
• Restructuring and collection activities across all workout phases and business segments
were consolidated under one umbrella.
• The collateral management function was enhanced and centralised.
• The financial risk management function joined the risk organisation structure. The team
subordinated to CRO drives the financial risk management strategy, defines methodologies
and sets limits, while the execution function rests with teams subordinated to CFO.
• The Constanta risk team was fully integrated within the risk management team.
• The risk management team was further expanded through internal promotions and
recruitment of new members. The current team is a combination of TBC Bank’s incumbent
team, Bank Constanta team and new external additions. The team is equipped with a wealth
of Georgian and international banking, regulatory and Big Four audit experience (including
at Intesa Sanpaolo, SocGen Group, JPMorgan, and Barclays). This is coupled with world
class MBAs and Master degrees from Insead, London Business School, Oxford, Imperial
College London, Bocconi University, Grenoble and others.
Further Enhancement of Risk Role in • Risk and business planning processes were further harmonised. A structured planning
Strategic Planning process with interactive development of the business and risk plans, increases the
feasibility of achievement of targets and alignment of the two by solving risk-return
trade-offs in the process.
Advancement and Automation of Risk • As part of business as usual improvements, the risk teams focused on improving the
Management Tools efficiency of the risk analysis process. For that purpose several software tools were
launched that increase the efficiency of the credit granting decision-making process,
collections process and borrowers financial ratio calculations.
Subsidiaries Risk Management • TBC Bank’s risk teams increased their involvement in subsidiary risk management,
Harmonisation within the Group especially in the areas of credit and operational risks. Despite the insignificant size of
subsidiaries, the Bank tries to maximise the synergies achievable through Group-wide risk
management and risk planning harmonisation.

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Risk Management Framework

All of the components necessary for comprehensive risk governance are embedded in the risk management framework, which is
comprised of enterprise risk management, credit, financial and non-financial risk management, risk reporting and the supporting IT
infrastructure, cross-risk analytical tools and techniques such as capital adequacy management and stress-testing. The following “figure
1” depicts the risk management framework building blocks.

Enterprise Risk Management

• Risk Appetite
• Risk Strategy
• Business Planning

Credit Risk Financial Risks Non-Financial Risks

Corporate MSME Retail Market Liquidity Operational Other

Risk organisation Governance Three lines Performance Risk

and governance Committees Policies
structure of defence management culture

Risk reporting Risk reporting & analytics

Systems and data Infrastructure, IT and systems

Risk models, Credit process

methodologies, ALM and liquidity risk Operational risk
processes modelling & processes modelling & processes
Credit risk modelling

Cross-risk
ICAAP, stress tests
analytics

Figure 1 TBC Bank’s Risk Management Framework

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Risk Organisation and Governance

TBC conducts its risk management activities within the framework of its unified risk management system. Involvement of all governance
levels in risk management, clear segregation of authorities and effective communications between different structures, facilitates clarity
regarding TBC’s strategic and risk objectives, adherence to TBC’s risk appetite and sound risk management. TBC’s governance structure
ensures adequate oversight and accountability, as well as clear segregation of duties. Figure 2 on Risk Governance Structure depicts the
major risk governance bodies at various levels: Supervisory Board, Management Board, Risk Management Organisation.

The Supervisory Board has the overall responsibility to set the tone at the top and monitor compliance with established objectives, while
the Management Board governs and directs TBC Bank’s daily activities.

Both the Supervisory Board and the Management Board have established dedicated risk committees. The Risk, Ethics and Compliance
Committee of the Supervisory Board supervises the risk profile and risk governance practice within TBC Bank while the Audit Committee is
responsible for the implementation of key accounting policies and the facilitation of internal and external auditor activities. The Management
Board Risk Committee was established to guide bank-wide risk management activities and monitor major risk trends to ensure the risk
profile complies with TBC’s established risk appetite. The Operational Risk Committee makes decisions related to operational risk
governance while the Assets and Liabilities Management Committee (“ALCO”) is responsible for the implementation of asset-liability
management policies.

Risk Governance Structure

Supervisory
Board Risk, Ethics &
Supervisory Board Audit Committee
Compliance Committee

Management
Board Risk Operational Risk Assets and Liabilities
Committee Committee Management Committee

Risk Functions:
Management
Structure
Credit Restructuring Financial Non-financial
ERM
Risk & Collections Risks risks

Committees:

Loan approval Committees Restructuring & Collections Committees

Figure 2 Risk Governance Structure

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The Supervisory Board and the senior management of TBC Bank Enterprise Risk Management
govern risk objectives through the Risk Appetite Statement (“RAS"), The core areas of the enterprise risk management framework are
which establishes the desired risk profile and risk limits for risk strategy and risk appetite setting and monitoring facilitation.
different economic environments. RAS also establishes monitoring The centralised ERM efficiently supports cross-risk activities such
and reporting responsibilities, as well as escalation paths for as cross-risk reporting, aggregation and analytics, capital
different trigger events and limit breaches which prompt risk teams adequacy and stress-testing. The ERM function also drives the
to establish and implement established mitigation actions. In order Bank’s risk culture.
to effectively implement TBC’s risk appetite into TBC’s day-to-day
operations, RAS metrics are cascaded into more granular limits at Credit Risk Management
the business unit level, establishing risk allocation across different A strong credit risk management function is critical for maintenance of
segments and activities. That way all employees play their part in a balanced loan portfolio and delivering sustainable returns. For that
the achievement of the Group’s risk results. The process of risk purpose, a prudent credit risk environment has been established
appetite setting and cascading is undertaken in parallel to the focusing on maintenance of efficient processes for credit risk
business planning process. The interactive development of identification, measurement, and monitoring. Credit risk management
business and risk plans aligns the plans by solving risk-return by risk teams is performed both on a transaction level and portfolio
trade-offs in the process and increases the feasibility of achieving level. As part of credit risk management, the underwriting unit is
the targets. involved in transaction level analysis and approval, putting in place
checks and controls over borrower analysis performed by business
Board level oversight, coupled with the permanent involvement of units. Credit risk management by a separate dedicated team is aimed
senior management in TBC’s risk management, and the exercise of at portfolio oversight and quality monitoring, and development and
top down risk allocation by the enterprise risk management maintenance of the credit risk management framework including
function, ensures clarity regarding risk objectives, intense modelling and collateral valuations.
monitoring of the risk profile against the risk appetite, the prompt
escalation of risk-related concerns and the establishment of Restructuring and Collections Management
remediation actions. In order to minimise losses from delinquent and non-performing
loans, the Bank has a centralised restructuring and collections
The daily management of individual risks is based on the three lines management framework within the risk organisation. A
of defence principle. While business lines are primary owners of comprehensive portfolio supervision system has been set up to
risks, risk teams assume the function of second line of defence. identify weakened credit exposures in a timely manner and take
This is performed through multiple processes, tools and techniques early remedial actions. Separate dedicated professionals focus on
for risk identification, analysis, measurement, sanctioning, restructuring, collections and recoveries of large corporates, SME,
monitoring and reporting. Committees established at operational micro, unsecured retail and secured retail loans. The teams’ efforts
levels are in charge of making transaction-level decisions as part of are based on a comprehensive framework of strategy selection for
a framework comprised of clear and sophisticated delegations of borrowers based on their credit quality profile and outlook.
authority based on the “four eyes principle”. All new products and Strategies are tailor made to the type and size of exposure. For
projects pass through risk teams to ensure risks are smaller retail and micro loans, a special collection system is in
comprehensively analysed. These control arrangements are aimed place to effectively manage overdue loans in a more automated
at making informed decisions that remain within the predefined risk manner. Efficient management of collections, recoveries and
appetite. Credit, liquidity, market, operational and other non- repossessed assets supports achievement of the desired portfolio
financial risks are each managed by dedicated teams. quality and cost parameters.

TBC’s strong and independent risk management structure enables Financial Risk Management
the fulfilment of all required risk management functions within the Liquidity risk, interest rate risk and FX risk are managed through
second line of defence by highly skilled professionals, with a defining and maintaining policies and procedures, models and
balanced mix of credentials in banking and real sectors, in local and forecasts and conducting stress-tests. Based on the analysis of the
international markets. emerging risks, the Bank initiates mitigating actions. The financial
risk management team under the CRO monitors the strategy and
Detailed descriptions of various functions performed within the risk limits compliance which is executed by the Asset-Liability
management function are provided below. management team subordinated to the CFO. This distribution of
functions between CRO and CFO was put in place at the end of 2015.
Prior to that, financial risks were managed by a team subordinated
to the CFO.

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Operational Risk Management (ORM) Risk Reporting and Systems

The main objective of operational risk management is to implement Sound risk reporting systems and IT infrastructure are important
and enforce an appropriate framework for identification, tools for the efficient risk management of TBC Bank, in particular
assessment, monitoring and reporting of operational risks. ORM for early identification and monitoring of risks and decision-making.
enables TBC Bank to identify and assess operational risk categories Thus, TBC Bank invests in and places significant emphasis on
across the Bank’s different processes and operations; to detect constantly driving the development of required software solutions.
critical risk areas or groups of operations with an increased risk In order to ensure availability and fast flow of information, TBC
level, to develop response actions; and suggest restrictions in Bank has established a dedicated risk reporting unit. Risk reporting
critical risk zones to mitigate identified risks. The ORM ensures that enables senior managers to exercise their oversight role. This is
operational risk exposure remains within TBC’s risk appetite. accomplished through delivery of comprehensive information and
analysis with adequate frequency for each recipient such as the
Additional Layers of Defence Supervisory Board, Management Board, various risk management
In addition to the risk teams that are subordinate to the CRO, the and other units. Risk reports balance a mixture of risk data,
Compliance Department is in charge of anti-money laundering analysis, interpretations and qualitative explanations.
(“AML") and compliance risk management. The Internal Audit
Department as a third line of defence is in charge of providing Credit Risk Management
independent and objective assurance and recommendations to TBC Credit granting is the major income-generating activity of TBC Bank
Bank and its shareholders to facilitate further improvement of as well as the major source of risk. Thus, the Bank dedicates
operations and risk management. significant resources to its management. Credit risk arises from
lending to large Corporate clients, SME, Micro and Retail
Compliance is managed by a function subordinated directly to the customers. Key significant components of credit risk are currency
CEO in charge of improving the entire compliance system. It is induced credit risk due to the high dollarisation level of the
responsible for coordinating the identification, assessment and economy, as well as concentration risk. Major objectives of credit
documentation of compliance risks associated with TBC’s activities, risk management are to put in place sound credit approval
including the development of new products and business practices, processes for informed risk-taking and procedures for effective
establishment of new types of business or customer relationships, risk identification, monitoring and measurement. The Bank adopts
or material changes in the nature of such relationships, and other segment and product specific approaches for prudent and efficient
related measures. The function administers TBC’s overall credit risk management.
compliance systems, performs compliance-related direction and
supervision, and instructs on corrective actions for branches, Credit Approval
offices, divisions, headquarters, subsidiaries and affiliates, both in TBC Bank strives to ensure a sound credit-granting process by
and out of Georgia, upon the occurrence of violations of compliance, establishing well-defined credit granting criteria and building up an
all in an integrated fashion. Anti-money laundering is one of the efficient process for assessment of a borrower’s risk profile. A
Compliance Department’s main functions, established according to comprehensive credit risk assessment framework is in place with
Georgian legislation and recommendations of competent clear segregation of duties among parties involved in the credit
international organisations. analysis and approval process.

The independent internal audit function represents a third line of The credit assessment process differs across segments, being
defence in all areas of the Bank’s risk-taking activities. The Internal further differentiated across various product types reflecting
Audit Department discusses the results of all assessments with different natures of these asset classes. Corporate, SME and larger
management and reports its findings and recommendations to the retail and micro loans are assessed on an individual basis with
Audit Committee. thorough analysis of the borrower’s creditworthiness and structure
of the loan. The decision making process for smaller retail and
The soundness of internal controls and risk management practices micro loans is largely automated, with borrowers receiving a credit
are subject to periodic reviews by an external auditor as well as score that reflects the outcome of the borrower’s risk profile
intense supervision by National Bank of Georgia, effectively assessment based on the dedicated scorecard models and credit
representing additional external layers of defence. bureau grading.

Different Loan Approval Committees are in place for the approval of

credit exposures to Corporate, SME, Retail and Micro
customers. Credit analysts and loan officers from Business Units
are primarily responsible for borrower analysis, structuring credit
facility and suggesting exposure approval to the loan approval
committee. Credit risk managers (as members of Loan Approval
Committees) ensure that the borrower and proposed credit
exposure risks are thoroughly analysed.

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The Bank puts in place sophisticated delegations of authorities for loan Credit Concentration Risk
approval that are based on the four eyes principle and require higher TBC Bank is exposed to concentration risk defined as potential
seniority levels of approval authorities with increasing sizes of deterioration in portfolio quality due to large exposures or
exposures. In particular, different tiers of Loan Approval Committees individual industries. Management tools are established by the
are responsible to review credit applications and approve exposures Bank in order to efficiently manage concentration risk. In particular,
considering the borrower’s aggregated liabilities and risk profile. A name concentration, sectoral concentration and unsecured lending
large or higher risk loan would be reviewed by a Loan Approval limits are defined as part of the Bank’s risk appetite framework.
Committee with a higher approval level, such as one including the The Bank is subject to single name as well as TOP 20 borrowers’
Chief Executive Officer, Corporate Business Director and Chief Risk concentration limits and focuses on optimisation of the structure
Officer. A loan to the top 20 largest borrowers or exceeding 5% of TBC and quality of the latter portfolio. Unsecured lending is capped by
Bank’s regulatory capital would require the review and approval of the the regulatory requirements. In addition, the Bank imposes limits
Risk, Ethics and Compliance Committee. on individual sectors with more conservative caps applied for
high-risk sectors, which are defined based on comprehensive
Such a structure is a sound platform for risk teams to facilitate analysis of industry cycles and outlook.
continuous ehancement and sophistication of borrower analysis by
business unit managers, introduce on line controls for risk-taking Credit concentrations are monitored by Enterprise Risk
and ensure that credit approval decisions are in compliance with Management and Credit Risk Management departments on a
Bank’s established risk appetite. monthly basis. Trends in the risk positions are analysed in details
and corrective actions are recommended should new sources of
Currency Induced Credit Risks (CICR) risk or positive developments emerge. Throughout the underwriting
TBC Bank faces currency-induced credit risk given that a large part process, risk teams analyse the impact of disbursing large
of its exposures are denominated in foreign currency in line with exposures on the Bank’s risk position to make sure that decisions
the dollarisation level of the economy. However, limits are are compatible with the Bank’s risk appetite.
established within the risk appetite framework to ensure the Bank
continues its efforts toward minimising the portfolio dollarisation Along with managing concentration levels in the portfolio, the Bank
level. Various management tools and techniques are applied to estimates unexpected losses and respective economic capital for
mitigate the inherent CICR risk in the loan book encompassing all single name concentration and sectoral concentration using the
phases of credit risk management. Herfindahl-Hirschman Index (HHI) thus ensuring that sufficient
capital is held against concentration risk.
The Bank applies more conservative lending standards to unhedged
borrowers with FX denominated exposures in order to ensure that Collateral Policies
they can withstand a certain amount of FX depreciation without Collateral represents the most significant credit risk mitigation tool for
credit quality deterioration. Currency fluctuation is one of the TBC Bank, thus, effective collateral management is one of the key risk
stress scenarios applied throughout analysis of corporate management components. Collateral on loans extended by TBC may
borrowers’ risk profile in order to assess the potential impact of the include, but is not limited to, real estate, cash deposit, vehicles,
currency depreciation on the borrower’s financial standing and thus equipment, inventory, precious metals, securities and third party
appropriately structure the loan. As a result, FX denominated loans guarantees. The collateral accepted against a loan depends on the
can withstand certain levels of currency shocks without quality type of credit product and on the credit risk of the borrower. The Bank
deterioration. has a largely collateralised portfolio on all of its segments with real
estate representing a major share of collateral.
Apart from the measures in place throughout the underwriting
process, the Bank actively monitors and assesses the quality of FX A centralised unit for collateral management is in place governing
denominated loans through stress-testing exercises and holds the Bank’s view and strategy in relation to collateral management
sufficient capital buffers against unexpected losses. and ensuring that collateral serves as an adequate mitigating factor
for credit risk management purposes. The collateral management
In the event of material currency depreciation, the Bank has tools in framework comprises of a sound independent appraisal process,
place to accelerate its monitoring efforts, identify customers with haircuts system throughout the underwriting process, monitoring
potential weaknesses, and introduce prompt mitigation. In and revaluations.
response to GEL devaluation in 2015 by approximately 30%, the
Bank focused on intense portfolio quality monitoring throughout Throughout the underwriting process provided collateral is
the year. During the monitoring process, the Bank assessed the appraised by TBC Bank’s Internal Appraisal Group in accordance
impact of currency depreciation on the overall portfolio as well as with TBC’s internal policies. In specific instances such as insider
the risk profile, and the estimated outlook for individual exposures. lending and material transactions the Bank uses external
Based on the monitoring results the Bank undertook proactive appraisers to validate appraisals. The Internal Appraisal Group is
restructuring, adjusted underwriting standards and ran a part of the collateral management unit and is independent from the
continuous follow-up monitoring process limiting potential impact loan granting process in order to ensure that adequate appraisals
of the devaluation on the Bank’s risk profile. are obtained and proper appraisal procedures are followed. When
appraising collateral, TBC Bank applies haircuts to the asset’s
market value based on the property type and its location.

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Loan officers and/or appraisers perform on-site visits to check the Restructuring and Collections
quality and condition of the provided collateral. Collateral of TBC Bank uses a comprehensive portfolio supervision system to
significant value (defined as cases in which the value of both the loan identify weakened credit exposures in a timely manner and take
and the collateral exceeds US$300,000) is re-evaluated annually early remedial actions. Collections and recoveries processes are
through on-site visits by internal appraisers. Statistical methods are invoked when the borrower does not meet the agreed payments or
used to monitor the value of collateral of non-significant value. the borrower’s financial standing is weakened, potentially
Collateral may require more frequent re-evaluation as a result of jeopardising the repayment of the credit.
changes in the borrower’s standing or market fluctuations. In case of
repossession, any collateral is also re-evaluated within three months Dedicated restructuring and recovery units are in place to manage
prior to repossession. Requirements relating to the frequency of weakened borrowers across all business segments, with collection
re-evaluations are determined in accordance with TBC Bank’s and recovery strategies tailored for business segments and
collateral appraisal policy. individual exposure categories.

Credit Monitoring The primary goal of restructuring units is to rehabilitate the

TBC Bank’s risk management policies and processes are designed to borrower and transfer the exposure back to the performing
identify and analyse risk in a timely manner, and monitor adherence to category. The sophistication and complexity of the rehabilitation
predefined limits by means of reliable and timely data. TBC Bank process differs based on the type and size of the exposure.
dedicates considerable resources to gain a clear and accurate Corporate and SME borrowers are transferred to the restructuring
understanding of the credit risk faced across various business units when there is a deterioration in the borrower’s financial
segments. The Bank uses a robust monitoring system to react timely standing, jeopardising the repayment of the credit. However, the
to macro and micro developments, identify weaknesses in the credit main source of the repayment remains the borrower’s cash flow. A
portfolio and outline solutions to make informed risk management restructuring manager assesses the customer relationship
decisions. Monitoring processes are tailored to the specifics of strategy and creates the turnaround plan, which considers the
individual segments. Monitoring processes encompass individual specifics of the circumstances and may involve a restructuring of
credit exposures, overall portfolio performance and external trends the exposure, a decrease in the borrower’s leverage (by spinning off
that may impact the portfolio’s risk profile. Early warning signals serve part of the borrower’s assets), raising equity, the sale of the
as an important early alert system for the detection of credit exposures to the third parties, taking control of the borrowers’ cash
deteriorations, leading to mitigating actions. flows and limiting its management’s business decisions.

For corporate and SME loans, monitoring is conducted by a credit Corporate and SME borrowers are transferred to the recovery unit
analyst (for corporate loans) and loan officer (for SME loans) and is when there is a strong probability that a material portion of the
reviewed by underwriting risk managers/credit sanctioners. principal amount will not be paid and the main stream of recovery is
Regular oversight of monitoring and selective reviews are no longer the borrower’s cash flow. Loan recovery plans consider
conducted by the credit risk management team. Debt repayments all available sources of loan recovery, such as selling the
are monitored on a daily basis. Retail borrowers are monitored for borrower’s assets, realising collateral or payments under
timely debt repayment on a daily basis. Statistical techniques are guarantees. TBC Bank’s goal in the recovery process is to negotiate
applied to the monitoring of the overall performance of the with the borrower a loan recovery strategy and secure cash
portfolio, with a deeper analysis performed for specific sub- recoveries to the extent possible or negotiate repayment through
segments in the event of signs of performance deterioration. Along the sale or repossession of collateral.
with the daily monitoring of debt repayments and a monthly analysis
of the portfolio’s performance, a dedicated unit is in place for Collection functions for retail and micro loans provide support to
on-site monitoring of micro loans considering the specifics of this customers who are experiencing difficulties in meeting their
segment and given that it is mostly represented by borrowers obligations. Such customers may miss payments, or notify TBC
residing in rural areas. The monitoring group undertakes site visits Bank about their difficulty with loan repayments. A centralised
to the borrower’s business to perform its analysis. This process monitoring team monitors retail and micro borrowers in
enables TBC Bank to promptly identify any inconsistencies with TBC delinquency, which coupled with branches’ efforts are aimed at
Bank’s lending policy and undertake corresponding actions. collection maximisation. Collection strategies are defined
considering the size and type of exposure. Specific strategies are
The Credit Risk Management Department analyses trends of the tailored for different sub-groups of customers, reflecting
portfolio on a regular basis, including total credit portfolio exposure, respective risk levels, so that greater effort is dedicated to
portfolio quality, vintage analysis, concentrations, maturities, volumes customers with a higher risk profile.
and performance of Non-performing Loans, write-offs and recoveries,
and presents its findings to the Management Board Risk Committee. Retail and micro loans are generally transferred to the recovery unit
Furthermore, reports relating to the credit quality of the credit at 90 days past due. Collateralised loans are transferred to the
portfolio are presented to the Supervisory Board’s Risk, Ethics and internal recovery unit, whereas TBC Bank collaborates with external
Compliance Committee on a quarterly basis. By comparing current collection agencies for unsecured loans. For recovery of
data with historical figures, and by analysing forecasts Management collateralised loans, the recovery plan is outlined considering
believes it is able to identify risks and respond to them by amending its specifics of the individual borrower and may involve loan repayments
policies in a timely fashion. under revised schedules or the sale of collateral. Collection agencies
generally negotiate with the borrowers the full repayment of the loan
or loans can be rescheduled and repaid accordingly.

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Once the exposure is transferred to the recovery unit, if TBC Bank be repaid or survive the one-year quarantine period and become a
is unable to negotiate acceptable terms with the borrower, the Bank performing portfolio. In case there is change in the internal or external
may initiate collateral repossession, which is usually standard and environment and historical data no longer reflects current conditions,
quite a fast process with limited legal complications, and may TBC Bank adjusts the risk parameters on the basis of current
include court, arbitration or notary procedures. Restructuring and observable data to reflect the effects of current conditions that did not
recovery units are supported by qualified incumbent lawyers for affect past periods, and to remove the effects of past conditions that do
efficient accomplishment of litigation and repossession processes. not exist currently.

Provisioning Guidelines TBC Bank will reverse a previously recognised impairment loss if,
According to TBC Bank’s policy, loan loss reserves must be maintained after the impairment was recognised, the amount of the impairment
at a level that is adequate to absorb all estimated inherent losses in loss decreases and the decrease is related to an objective event.
TBC Bank’s credit portfolio at any given point in time. The previously recognised impairment loss is reversed by adjusting
the allowance account through profit or loss. In order to reverse
The credit portfolio is assessed for impairment on an individual and provisions for individually significant borrowers, there should be
collective basis. For provisioning purposes, borrowers or groups of objective evidence that the borrower’s financial standing has
borrowers are classified as “significant” or “non-significant”. improved or there is an improvement in collateral coverage. For
Borrowers with total liabilities of GEL 2 million or more are collectively assessed loans, the exposure should survive the
regarded as significant. quarantine period to be reclassified as a performing loans pool.

To assess impairment with respect to individually “significant” Liquidity Risk Management

borrowers, TBC Bank outlines trigger events, which include the Liquidity risk is the risk that TBC either does not have sufficient
deterioration of the borrower’s financial standing, delinquencies in financial resources available to meet all of its obligations and
loan repayments, bankruptcy proceedings, or other events that may commitments as they fall due, or can access those resources only
affect the borrower’s creditworthiness. If there is evidence that an at a high cost. Liquidity risk is managed by the Financial Risk
impairment loss event with respect to a significant credit exposure Management and Treasury Departments and is monitored by
has occurred, TBC Bank assesses the borrower on an individual the ALCO.
basis and measures the amount of the loss as the difference
between the asset’s carrying amount and the present value of The principal objectives of TBC’s liquidity risk management policy
estimated future cash flows. TBC Bank estimates future recoveries are to:
by applying a scenario analysis and taking into account all relevant (i) ensure the availability of funds in order to meet claims arising
information available at the reporting date, including adverse from total liabilities and off-balance sheet commitments, both
changes in the general macroeconomic environment or the industry actual and contingent, at an economic price;
the borrower operates in. (ii) recognise any structural mismatch existing within TBC’s
statement of financial position and set monitoring ratios to
If TBC Bank determines that no objective evidence exists that an manage funding in line with the Bank’s well-balanced growth;
individually assessed financial asset has been impaired, it includes and
the asset in a group of financial assets with similar credit risk (iii) monitor liquidity and funding on an ongoing basis to ensure that
characteristics and collectively assesses them for impairment. For approved business targets are met without compromising
collective assessment purposes, financial assets are grouped into TBC’s risk profile.
homogenous risk pools based on similar credit risk characteristics,
including the type of counterparty (individual or business), the type The Liquidity risk management Policy is reviewed by the
of product, the past-due status of the financial asset, the Management Board prior to approval by the Supervisory Board.
restructuring status and the type of collateral.
Liquidity risk is categorised into two risk types: funding liquidity
In order to calculate the impairment allowance for collectively risk and market liquidity risk.
assessed loan pools, TBC Bank estimates certain risk parameters,
which include the probability of default, cure rate, recovery rate, Funding liquidity risk is the risk that TBC will not be able to
survival rate and loss given default, based on historical experience. efficiently meet both expected and unexpected current and future
Probabilities of defaults are calculated based on migration matrices cash flow without affecting either its daily operations or its financial
for different overdue buckets within the portfolio and increase based
condition under both normal conditions and during a crisis
on the number of payments missed, thus raising the associated
situation. To manage funding liquidity risk, TBC internally developed
impairment requirement. For recovery rate estimation purposes, the
impaired portfolio is segmented based on the number of months in a Liquidity Coverage Ratio (LCR) and a Net Stable Funding Ratio
default and the amounts to be recovered are estimated, which (NSFR) model both under Basel III liquidity guidelines. In addition,
decrease as the number of months in default increase. Cure rates TBC also applies stress tests and “what-if” scenario analyses, and
estimate the extent to which defaulted exposures can be cured by the monitors NBG minimum liquidity ratio.
borrower repaying the overdue amounts in full. Exposures with a
longer time in default have lower cure rates compared to newly LCR (calculated by reference to the sum of qualified liquid assets
defaulted exposures. For cured exposures, TBC Bank also estimates and 30-day cash inflows divided by 30-day cash outflows) is used to
survival rate, which represents the probability that the exposure will help manage short-term liquidity risks. TBC’s liquidity risk

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management framework is designed to comprehensively project “trading book” (financial instruments or commodities held for
cash flows arising from assets, liabilities and off-balance sheet trading purposes); and (b) foreign exchange risk and commodities
items over certain time bands and ensure that liquidity coverage risk throughout TBC. TBC’s strategy is not to be involved in trading
ratio limits are put in place. TBC also stress tests the results of financial instruments or investments in commodities. Accordingly,
liquidity through large shock scenarios set by the NBG. TBC TBC’s only exposure to market risk is foreign exchange risk in its
calculates its internal liquidity coverage ratio and conducts stress “structural book,” comprising its regular commercial banking
tests on a weekly basis. TBC Bank’s liquidity coverage ratios were activities having no trading, arbitrage or speculative intent.
288%, 254% and 344% for the years ended 31 December 2015, 2014
and 2013, respectively. Foreign Exchange Risk Management
TBC is exposed to currency risk that arises from potential change in
NSFR (calculated by dividing available stable by required stable foreign currency exchange rates, which can affect the value of a
funding) is used for long-term liquidity risk management to promote financial instrument. This risk stems from the open currency
resilience over a longer time horizon by creating additional incentives positions created due to mismatches in foreign currency assets and
for TBC to rely on more stable sources of funding on a continuing basis. liabilities. The NBG requires TBC Bank to monitor both balance
sheet and total aggregate balance (including off-balance sheet)
Market liquidity risk is the risk that TBC cannot easily offset or open currency positions and to maintain the latter within 20% of
eliminate a position at the then-current market price because of TBC Bank’s regulatory capital. For the year ended 31 December
inadequate market depth or market disruption. To manage market 2015, TBC Bank maintained an aggregate balance open currency
liquidity risk, TBC follows Basel III guidelines on high-quality position of 1.56%.
liquidity asset eligibility to ensure that TBC’s high-quality liquid In addition, the Supervisory Board sets further limits on open
currency positions. The ALCO has set limits on the level of exposure
assets can be sold without causing significant movement in the
by currency and for total aggregate position which are more
price and with minimum loss of value.
conservative than those set by the NBG and the Supervisory Board.
TBC Bank’s compliance with these limits is monitored daily by the
In addition, TBC has a liquidity contingency plan, updated annually,
heads of the Treasury and Financial Risk Management Departments
which forms part of TBC’s overall prudential liquidity policy and is
and is reported periodically to the Management Board, the
designed to ensure that TBC is able to meet its funding and liquidity
Supervisory Board and the Risk, Ethics and Compliance Committee.
requirements and maintain its core business operations in
deteriorating liquidity conditions that could arise outside the
Open currency positions are used to assess TBC Bank’s minimum
ordinary course of its business.
capital requirements under the ICAAP framework on a monthly
basis. In addition, the Financial Risk Management Department
Funding and Maturity Analysis performs stress testing on a monthly basis.
TBC’s principal sources of liquidity include customer deposits and
customer accounts, borrowings from local and international banks Interest Rate Risk Management
and financial institutions, subordinated loans from IFI Investors, Interest rate risk arises from potential changes in market interest
local inter-bank short-term term deposits and loans, proceeds rates that can adversely affect the value of TBC’s financial assets
from sales of investment securities, principal repayments on loans, and liabilities. This risk can arise from maturity mismatches of
interest income, and fee and commission income. assets and liabilities, as well as from the repricing characteristics
of such assets and liabilities. The deposits and 80% of the loans
We believe that a strong and diversified funding structure is one of offered by TBC are at fixed interest rates, while a portion of TBC’s
TBC’s differentiators. TBC relies on relatively stable deposits from borrowing is based on a floating rate of interest. TBC’s floating rate
Georgia as the main source of funding. In order to maintain and borrowings are, to a certain extent, hedged as a result of the NBG
further enhance its liability structure TBC sets targets for retail paying a floating rate of interest on the minimum reserves that TBC
deposits in the strategy and sets gross loan to deposit ratio limits. holds with the NBG. Furthermore, many of TBC’s loans to and
TBC’s gross loan to deposit ratio (defined as total value of gross deposits from customers contain a clause allowing TBC to adjust
loans divided by total value of deposits) was 111.0%, 111.6% and the interest rate on the loan/deposit in case of adverse interest rate
102.5% as at 31 December 2015, 2014 and 2013, respectively. movements, thereby limiting TBC’s exposure to interest rate risk.
Management also believes that TBC’s interest rate margins provide
TBC also sets deposit concentration limits for large deposits and a reasonable buffer in order to mitigate the effect of possible
deposits of non-Georgian residents in its deposit portfolio. adverse interest rate movement.

We believe that TBC has sufficient liquidity to meet its current on TBC Bank employs an advanced framework for the management of
and off-balance sheet obligations. interest rate risk. In order to manage interest rate risk, TBC Bank
establishes appropriate limits, monitors compliance with the limits
For further information on management of liquidity risk, please and prepares forecasts. Interest rate risk is managed by the
refer to Note 35 to the Audited Consolidated Financial Statements. Financial Risk Management Department and is monitored by the
ALCO. The ALCO decides on actions that are necessary for effective
Market Risk interest rate risk management and follows up on their
TBC follows the Basel Committee’s definition of market risk as the implementation. The major aspects of interest rate risk
risk of losses in on and off-balance-sheet positions arising from management development and the respective reporting are
movements in market prices. These risks are principally (a) risks periodically provided to the Management Board, the Supervisory
pertaining to interest rate related instruments and equities in the Board and the Risk, Ethics and Compliance Committee.

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TBC Bank measures four types of interest rate risk based on the analysis; business advisory with regard to nonstandard cases as well
source of the risk: (i) repricing risk, (ii) yield curve risk, (iii) basis as new products and procedures assessment; IT incident occurrence
risk and (iv) optionality (embedded option risk). monitoring and overseeing activities targeted at solving identified
problems; and insurance policies to transfer the risk of losses from
TBC Bank considers a number of stress scenarios, including operational risk events. The ORM department reports to the Chief Risk
different yield curve shift scenarios and behavioural adjustments to Officer.
cash flows (such as deposit withdrawals or loan prepayments), to
calculate the impact on one-year profitability and enterprise value. For the purpose of measuring potential (both expected and
Appropriate limits are set by the Supervisory Board and by the ALCO. unexpected) operational risk losses and appropriate capital, the Bank
uses quantitative tool such as the Advanced Measurement Model
Under the ICAAP framework, TBC Bank reserves capital in the (AMA) that incorporates internal and external loss data as well as a
amount of the adverse effect of possible parallel yield curve shift scenario analysis of possible events.
scenarios on net interest income over a one-year period for Basel II
Pillar 2 capital calculation purposes. As at 31 December 2015 the There are various policies, processes and procedures in place to
impact of the downward parallel shift of a yield curve of (4.8)% in control and mitigate material operational risks. These include:
GEL and a downward parallel shift of 2.4% in USD on net interest • outsourcing risk management policy which enables TBC Bank to
income over a one-year period was equivalent to GEL 35.7 million. control outsourcing (vendor) risk arising from adverse events
In addition, TBC has developed stress tests in accordance with and risk concentrations due to failures in vendor selection,
Basel II requirements to ensure that the Bank can withstand severe insufficient controls and oversight over a vendor and/or services
but probable stress scenarios. provided by a vendor and other impacts to the vendor;
• implementation of procedures to analyse system flaws and take
Operational Risk Management corrective measures to prevent the re-occurrence of significant
One of the main risks TBC Bank is exposed to is operational risk, which losses;
is the risk of loss resulting from inadequate or failed processes, people • involvement of the Operational Risk Department in the approval
and systems or from external events. It includes legal risk, but process of new products and services to minimise risks relating
excludes strategic and reputational risk. However, reputational risk thereto; and
management is also given high importance and priority and is an • development of a special Operational Risk Awareness program
integral part of the overall risk culture in the organisation. for TBC Bank employees and provision of regular training to
further strengthen TBC’s internal risk culture.
In order to oversee and mitigate operational risk, TBC Bank has
established an operational risk management framework that outlines An Information Security Steering Committee has been established
the general principles for effective operational risk management and in charge of continuous improvement of information security and
defines the roles and responsibilities of various parties involved in the business continuity management processes and minimising
process. Policies and procedures enabling effective management of information security risks. The Committee has been formed to
operational risks are an integral part of the framework. centralise the information security function including physical
security, HR security, data security, IT security and business
The Management Board ensures a strong internal control culture continuity. The Bank invests in effective information security risk
within the Bank where control activities are an integral part of TBC management, incident management and awareness programs,
Bank’s operations. The Supervisory Board sets TBC Bank’s which are enhanced with automated tools that ensure acceptable
operational risk appetite and the Operational Risks Committee levels of information security risk within the organisation.
oversees compliance with the limits set therein. The Operational Risks Whenever preventive controls are not applicable, comprehensive
Committee discusses TBC Bank’s operational risk profile and risk business continuity and incident response plans ensure TBC Bank’s
minimisation recommendations on a regular basis. ability to operate on an ongoing basis and limit losses in the event of
The Operational Risk Management Department is responsible for the a severe business disruption.
implementation of appropriate policies and procedures enabling the
Bank to manage operational risks. The ORM department is also Reputational Risk Management
responsible for the day-to-day management of operational risks using TBC’s business model is built on public trust and therefore aims to
various techniques that include but are not limited to the running of ensure that no activities are undertaken which may result in an
risk and control self-assessment aimed at detecting possible gaps in adverse reputational impact. Management believes that one of
operations and processes with the purpose of suggesting appropriate TBC’s key strengths is its well-known and trusted brand, and is
corrective actions; internal risk event database formation for further consequently very protective of the strong reputation that TBC has
quantitative and qualitative analysis; performing internal control for developed on the market. Hence the maintenance of a strong
detecting systematic errors in banking operations, internal fraud reputation is considered to be a goal of highest priority and
events and monitoring key risk indicators; scenario and root cause importance and reputation risk awareness and management is
embedded throughout the Bank including all business units and
responsibility levels.

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TBC’s reputation risk management efforts include: TBC’s anti-money laundering programme, established in
• monitoring TBC’s reputation, addressing matters damaging that accordance with Georgian law, is a part of TBC’s compliance
reputation and using the feedback from external stakeholders to framework. The anti-money laundering unit of the Compliance
gain insights or receive early warning signals of potential Department (AML Unit) is responsible for anti-money laundering
concerns; issues. The anti-money laundering policy and complementary
• identifying and reporting reputational risk-related matters by internal standards and procedures include Georgian law
both business units and risk staff in their daily interactions with requirements, as well as measures based on recommendations
clients as well as through the process of project and product from international bodies, such as the Financial Action Task Force,
development; and Basel, United Nations and the Office of Foreign Assets Control, and
• restricting activities that may cause reputational damage to TBC contain “Know Your Customer” procedures, methods for the
Bank, such as projects and activities having negative assessment of correspondent banks, processing and retaining
environmental or social impacts. documentation, maintaining and updating client databases,
operational standards, risk-based assessment of customers, due
Strategic Risk Management diligence procedures, and the identification of suspicious
Strategic risk is the current or prospective risk to earnings and transactions and transactions that are subject to mandatory
capital arising from adverse business decisions, improper reporting to the Financial Monitoring Service of Georgia (FMS). The
implementation of decisions, or lack of responsiveness to changes anti-money laundering policy (and any amendments thereto) is
in the business environment, both internal and external. This risk is approved by the Management and the Supervisory Board. TBC
a function of the compatibility of TBC’s strategic goals, the business Bank’s anti-money laundering policy and all related internal
strategies developed and resources employed to achieve strategic instructions and standards are available to all employees through
goals, and the quality of implementation of those goals. TBC Bank’s intranet.

The aim of strategic risk management efforts is to maintain TBC’s To adhere to anti-money laundering policy requirements, TBC Bank
strategic risk at defined levels in accordance with its strategic has implemented automated solutions for (i) client screening
objectives. The strategic risk management system consists of the against sanctioned lists during the on-boarding process and
following main stages: (i) identification, (ii) measurement, (iii) international money transfers, (ii) anti-money laundering risk
monitoring and (iv) control and mitigation. assessment of clients, products and services, and (iii) revealing
suspicious behaviour on client’s accounts. An automated process is
performed through Siron products provided by FICO-Tonbeller.
The Management Board has overall responsibility for TBC’s
strategic objectives and key principles of the strategic risk The Compliance Department delivers face-to-face training in
management framework. The primarily responsibility for strategic anti-money laundering and compliance topics which are tailored for
risk assessment, management, monitoring and control lies with the different target groups, including new employees. Training in
Strategic Planning and Budgeting Department and TBC’s business anti-money laundering and other compliance issues is conducted
segments. annually and is followed by staff testing on an annual basis.

An analysis of TBC Bank’s actual performance compared to its stated TBC’s anti-money laundering compliance activities are reviewed
goals is reported to the Management Board on a regular basis. This annually by its Internal Audit Department. Since the previous
report includes the level of strategic risk for the period and its report, TBC Bank and its subsidiaries have not been inspected by
dynamic, mitigating actions undertaken to address these risks, the National Bank of Georgia regarding abidance of the anti-money
potential strategic risks for future periods and recommendations. laundering law. As of the date of this report, no TBC Group
Company has been accused, named or cited in connection with any
Compliance and AML Risk Management occurrence of money laundering, financing of terrorist activity,
TBC Bank has established a compliance function that is fraud, or other corrupt or illegal purpose transactions or breaches
represented by a three-level structure consisting of the Compliance of Georgian laws prohibiting such activities.
Department, the CEO and the Risk, Ethics and Compliance
Committee. The Compliance Department is responsible for, but not
limited to, assisting with the identification and assessment of
compliance risk in all business activities; advising on compliance
policy, processes, rules and standards; assessing the impact of
new laws, regulations and guidelines; assessing the adequacy of
internal compliance processes; helping with the coordination of
responses to requests from external regulators and ensuring that
TBC follows appropriate procedures including in relation to
anti-money laundering, conflicts of interest, protection of non-
public customer information and insider trading. The Compliance
Department is accountable to the Risk, Ethics and Compliance
Committee and the Supervisory Board, and acts independently
within TBC Bank.

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Internal Capital Adequacy Assessment Process Stress Testing

The level of capital that TBC Bank is choosing to hold is impacted by TBC Bank performs regular stress testing exercises which
the following factors: represent a significant management decision making component.
• minimum regulatory requirements (Pillar 1); The Bank has developed a comprehensive, Enterprise-Wide Stress
• ICAPP (Pillar 2); Testing (EWST) framework that is actively used for capital
• regulatory add-ons (Pillar 2, SREP); and management and risk assessment purposes. The stress
• business expectations. parameters used in EWST are negative trends of GDP, exchange
rates, unemployment, interest rates, CPI levels and real estate
Currently, TBC must comply with two regulatory capital adequacy price levels. The results of EWST are expressed as the amount of
requirements imposed by the NBG in line with the Basel capital needed (per risk type) in order to withstand the full potential
Committee’s standards. The new Basel II/III framework, introduced losses resulting from the specified stress events.
by the NBG in 2013, replaces the previous Basel I based
requirements, which are gradually being phased out and will be Two severity levels are considered for performing enterprise-wide
fully removed by the end of 2017. The NBG version of the Basel II/III stress tests. A mild stress scenario is considered to be a stress that
requirements is a more conservative version of the original Basel might occur during the normal business cycle (once in seven years).
II/III framework, with the main difference being an additional 75% A severe stress scenario is based on the assumption of occurrence
risk weight for foreign currency denominated loans. once in 100 years.

For Pillar 2 purposes, TBC has implemented an Internal Capital The Bank has introduced an internal capital buffer that is equal to
Adequacy Assessment Process (ICAAP), whereby TBC Bank the losses under a mild stress scenario. Additionally the Bank
assesses all material risks that it faces and reserves capital for maintains a level of equity that covers losses under a severe stress
each. TBC Bank’s ICAAP is subject to a Supervisory Review and scenario.
Evaluation Process and it engages in active dialogue with the
regulator to demonstrate that the Bank adequately measures its
unexpected losses and holds sufficient capital against it.

The key components of TBC’s ICAAP process include risk

identification and assessment and capital allocation.

The table below summarises the material risks TBC Bank faces
and the approaches used to calculate capital charges for each
identified risk.

Summary of Risks Considered per Basel Pillar 1 and 2

Key areas Pillar 1 Pillar 2

Credit Risk Standardised Standardised

approach approach
Currency Induced NBG assessment Bank assessment
Credit Risk (CICR)
Market Risk Standardised Standardised
approach approach
Operational Risk Basic indicator Advanced
approach measurement
approach
Interest Rate Risk — Advanced approach
in the Banking Book
Reputation Risk — Benchmarking
Strategic Risk — Benchmarking
Concentration Risk — Bank assessment

112 TBC BANK ANNUAL REPORT AND ACCOUNTS 2015