Turkey: What Is New For Private Equities In Basel III: The Turkish Experience

Last Updated: 18 November 2013
Article by Safak Herdem and Pinar Pudun

Basel III is a key regulation that is aiming to build on the already existing Basel II regulation by series of amendments. The regulation is considered one of the most critical for global financial stability considering the destabilizing role the banking sector had played during the latest global economic meltdown. The Private Equities, like rest of the actors in the global markets, will benefit from the strengthening of the banking sector and reining in of the destabilizing capabilities of the banking sector by the Basel III regulations.

The new regulation is going to bring stringent rules for the banks to operate. Core solvency ratio for the banks will be retained as the 8% of the risked weighted assets as well as a 2% increase is introduced to the minimum common equity requirement that will raise it to 4.5% by 2015. Moreover, by 2015 the capital base, including common equity, will increase from 4% to 6%. There will also be a capital conservation buffer requirement brought by the new regulation that amounts to the 2.5% of the risk weighted assets. This is going to create in effect a requirement ratio of 7% of risk weighted assets in common equity; 4.5% minimum requirement and 2.5% capital conservation buffer.

Turkish Experience

Basel III regulation will undoubtedly have significant affects on the private equity markets. Even thought there might be some concerns with regard to the liquidity markets due to the stringent Basel III requirements, what the Basel III regulation is trying to achieve, namely a strong and stable banking system, is quite beneficial for the private equities which rely on stable financial markets and liberal credit opportunities. Especially what is critical for the banking system to be based on sound basis is the Liquidity Coverage Ratio required by the Basel III regulation which envisages a bank to hold sufficient high-quality liquid assets to cover its total net cash outflows over 30 days. Here it should be mentioned that the then crisis ridden Turkish banking sector in 2001, has taken very similar steps envisaged by the Basel III regulation and restructured its own Liquidity Coverage Ratio along the would be Basel III lines. Especially the Banking Regulation that has been introduced following the 2001 financial collapse in Turkey, has taken precautions against the Banks' involvement in to high leverage toxic assets creating high risk transactions. It reorganized the liquidity management of the banks and introduced a flexible payment system in order to ensure a problem free money market. Banking Law number 5411 in 2005 even more reinforced those aforementioned measures and expanded the scope of the regulation as well as efficiency of the supervision.

Given the fact that it was the banking crisis that was behind the latest global economic meltdown, the private equities will benefit significantly from the strengthening of the foundations of the banking sector that will be much less prone to trigger financial crisis as the contributions of the well regulated Turkish banking sector to Turkey's macro-economic stability since 2001 attests and the growth of investment volumes to the country indicate.

Basel III is paying a special attention to the issue of the leverages. As it is demonstrated during the 2008 global market collapse, such high leverage financial instruments led the banks to take incomprehensible risks where in most cases neither the lender nor the creditor understand the true nature of the financial endeavors that they got involved with and hence emerged the toxic assets that poisoned the global financial markets. Here again, the benefit that is provided by the Basel III regulation for the private equities is the emergence of a strong banking sector that is barred from indulging in such toxic asset generating activities as well as damaging the stable market conditions that all the actors are operating, including the private equities. And if the experience of the Turkish market, which have already been subjected to such kind of banking regulations similar that of Basel III, is of any value then such regulations might lead the banks to be more selective in terms of lending practices and encourage the banks to work mainly with the well established corporate firms even at the cost of lower credit lending rates. Such expectations are in immense importance for the Private Equities that are constantly in search of new credit opportunities and financial resources.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Safak Herdem
 
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