Lack of sufficient regulatory control over banks was one of various factors that led to Turkeys most recent economic crises. Following a phase of sustained deflation in 2001, the need for a stricter monitoring system became evident, and the Turkish government has taken some concrete steps since then. Apart from the focus on corruption, a number of regulations have been introduced in order to prevent the repetition of any similar problems. Independent regulatory agencies have brought, and are continuing to bring, some major changes to the Turkish banking sector.
Draft Financial Services Act
The Turkish government, relevant ministries, regulatory authorities and banking sector representatives have been discussing a major overhaul of the Turkish Banks Act since the year 2001. The fourth draft of the Financial Services Act ("Draft Act") was released to the public on the website of the Banking Regulation and Supervision Agency ("BRSA") on 24 November 2004, and the introduction of the Draft Act is expected in early 2005. After all, this is among Turkeys commitments to the IMF and is regarded as a condition precedent for a new standby agreement with the IMF. Although the Prime Ministry has, as of the date this article was written, submitted to the Council of Ministers a bill substantially based on the Draft Act, there remains some uncertainty regarding the timing of the bills enactment.
In order to harmonize the Turkish banking legislation with international norms and standards and EU legislation, the Draft Act aims to introduce basic structural changes to the banking system. Unlike the current legal system, the new law is expected to regulate "financial services" and group company relations rather than merely the banks and their services. Therefore, extensive definitions including financial holding companies, financial institutions, parent companies, affiliates and controlling shareholders are included in the Draft Act. Moreover, the Draft Act expands the scope of activities that may be carried out by banks directly by allowing them to undertake many of the capital markets-related activities currently carried out only through their affiliated intermediary institutions.
In line with international standards, provisions regarding internal control, risk management and monitoring systems, auditing of banks through auditors of the BRSA or independent external auditors, which is a heavily discussed issue, valuation by rating institutions and activities relating to companies that will provide supporting services, i.e., outsourcing companies, are also regulated under the Draft Act. Although no major amendments are proposed in this respect, unlike the current Banks Act system, the Draft Act includes very detailed provisions regarding credit extensions, risk groups, credit monitoring and reserve requirements, which are currently regulated under the secondary legislation.
With respect to regulatory authorities and measures to be taken by the BRSA against violations and incompliance with legislative/regulatory requirements, the Draft Act proposes that the BRSA be involved in cases that are more specific, and sets forth concrete measures against such cases. As a major amendment, the Draft Act provides that the Savings Deposit Insurance Fund ("SDIF") directly liquidates the assets of a failed bank through bankruptcy procedures, rather than any remedial measures to keep the failed bank in the system through mergers, loan portfolio sales, assignment of debts/receivables etc. Despite these new provisions, through a temporary provision, the Draft Act proposes that measures currently applied to failed banks be carried out and concluded in accordance with the relevant provisions of the Banks Act, which are very detailed and impose severe sanctions against those who are deemed responsible for such failures.
There are comprehensive provisions in the Draft Act regarding authorities, rights and obligations of the SDIF, which became an independent regulatory authority in December 2003. Prior to the enactment of Law No. 5020 in December 2003, which amended various provisions of the Banks Act, the SDIF was represented and managed by the board of the BRSA, which made the SDIF a legal entity under the control of the BRSA. With the amendments introduced in late 2003, the SDIF is now managed and represented by its own board, making it an autonomous agency and the authorities of the board of the BRSA relating to the SDIF have been transferred to the board of the SDIF. The Draft Act preserves the current system and proposes to improve the rights and authorities of the SDIF with detailed provisions.
Towards Basel II
Due to banking crises in Turkey during the past years, the BRSA has been emphasizing the importance of effective risk management and has shown its commitment to strictly implement its related regulations. In March 2003, the Basel II Guidance Committee was established within the Turkish Banks Association with the participation of the BRSA representatives and risk management directors of banks. Since then, the committee holds monthly meetings for preparations to Basel II. Through committees and in coordination with bank representatives and other relevant regulatory authorities, the BRSA has been working on Basel II as a part of a strategy aiming at better management of risks, rather than merely a calculation of certain ratios. The BRSA is expected to announce a roadmap to Basel II that will enable all the interested parties to work on risk management in a more comprehensive and systematic basis.
Basel II may be the remedy for Turkeys hopes to improve banks efficiency on risk management, commercial functions, market discipline, and corporate governance applications. Along with the well-known advantages of Basel II, there are some burdens that Turkey will inevitably face. Pursuant to Basel II, the credit risk of every borrower will be evaluated on the basis of their own ratings as determined by independent rating companies. After the implementation of Basel II, Turkeys credit risk will increase up to 100 %, which was previously 0 %, due to its low credit rating and companies without an independent rating will be evaluated on the basis of Turkeys rating. In particular, small companies are likely to encounter some problems in obtaining financing.
For banks, the cost of conversion to Basel II may in some cases be high, since Basel II requires high technical capacity and therefore major investments in human resources and IT infrastructure. Banks that opt to apply more advanced methods of risk calculation are likely to face more difficulties. Although there are well-established statistical and mathematical methods for calculating credit and interest rate risks in Basel II, the determination of operational, strategic or business risk will be much more difficult.
According to official reports of the BRSA, Turkey is not yet ready for Basel II. However, steps have been taken in order to prepare for the inevitable conversion in the future. Basel II will be an opportunity for Turkey to establish a more effective and reliable banking system.
Draft Act on Credit Cards and Bank Cards
With the positive effect of recent economic developments in Turkey, cash purchasing habits of Turkish consumers have decreased and use of credit cards and bank cards have increased significantly. This is also due to favorable payment terms offered by banks and card companies. Relevant authorities have started to comment on possible risks of this increase in use of credit cards both to relevant banks and card companies and to consumers. For this reason, a draft act, which has not been on the agenda of any authority for nearly two years, is being discussed.
The BRSA prepared a Draft Act on Credit Cards and Bank Cards. Highlights of this draft act are as follows:
- The BRSA will be the regulatory authority monitoring and overseeing the system.
- No card will be issued without a request from the consumer.
- Card agreements will be clear, simple and prepared in legible forms and the agreement will include all the interest rates, taxes and fines payable. No interest, tax or fine will be charged to the consumer if not set forth under the agreement.
- Card companies will determine their card limits. The BRSA will issue regulations on general and individual card limits applicable to banks. If these are not complied with, monetary fines will be imposed.
- The cardholder will not be responsible for payment of the expenses after written notification of theft.
- Unauthorized use of cards will be punished with imprisonment and monetary fines. False theft notifications will also be punished with imprisonment and monetary fines.
Most Recent Mergers & Acquisitions
Being subject to strict regulatory requirements on capital adequacy, organizational/corporate structure and risk management, Turkish banks started to look for strong foreign partners who will assist them to grow in a more competitive and regulated environment. Coupled with the effect of recent promising economic and political developments in Turkey and the compared to more saturated markets, extraordinary growth potential of the Turkish banking sector, foreign banks interest to increase their presence in the Turkish market has increased considerably.
Yapı Kredi and Koç / Unicredito deal
After the failure of Pamukbank A.Ş. and its transfer to the SDIF, the Çukurova Group had to enter into two protocols with the SDIF for payment of its debts. According to the First Protocol, shareholders rights attached to the shares of the Çukurova Group in Yapı Kredi were transferred to the BRSA other than the dividend rights attached to those shares. On 4 August 2004, the Çukurova Group entered into an additional protocol with the SDIF following a prolonged negotiation period. Under these protocols, the Çukurova Group had to pledge shares of certain subsidiaries, including shares of Turkcell, the leading mobile telecommunications company in Turkey, as collateral for the Çukurova Groups debts against the SDIF. In order to meet the requirements under these protocols, the Çukurova Group had to sell Yapı Kredi by 31 January 2005.
It was announced on 31 January 2005, that the Çukurova Group and Koç agreed on the sale of Yapı Kredi to Koç Finansal Hizmetler A.Ş., which is a joint venture of Koç and Unicredito. Pursuant to the disclosures made by the relevant parties, statements of the BRSA and SDIF officials and newspaper reports, an agreement for the sale and purchase of Yapı Kredi shares was executed between the Çukurova Group and Koç Finansal Hizmetler A.Ş. Due to the undertakings of the Çukuorova Group in these protocols, the parties had to reach an agreement within a very short period of time, despite the fact that Yapı Kredi is the fifth largest bank in the sector with a complex corporate structure holding various affiliated companies. Although it was announced that the sale/purchase agreement was signed, the sale transaction has not been yet completed, and the BRSA is closely monitoring the process. The president of the BRSA stated that the last words on this sale will be said by the regulatory authorities, adding that the authorities will not impede the process.
Although the deadline imposed on Çukurova Group was 31 January 2005, and prior to 31 January, the BRSA and TMSF officials were very rigid about such deadline, as of the date this article was written, the deal has not been closed yet. After several bank failures in recent years and take over by the BRSA of such banks and their assets, BRSA became the entity controlling affiliated companies of major holding groups from various sectors. Yapı Kredi is one of the major banks in Turkey and as the banking regulators define, is too big to fail. Therefore, BRSA seems to be acting relatively flexible in this deal. This is due to the fact that the BRSA and SDIF are under the pressure to manage and liquidate the assets in their hands, but at the same time may be contradicting since they have to keep their standing as non-compromising authorities regulating a system, the collapse of which can effect the whole financial system.
The sales of assets by the SDIF will continue with an effort to remove the financial burden of the failed banks from the government and it seems like the banking regulators will be acting cooperative in those sales rather than impeding the process.
TEB / BNP Paribas Deal
BNP Paribas acquired 50% of the financial holding company TEB Mali Yatırımlar A.Ş. (TEB Mali), which owns 84.25% of the publicly listed mid-size bank Türk Ekonomi Bankası A.Ş. (TEB Bank) for 216.8 million USD. Negotiations between TEB Mali and BNP Paribas had started in June 2004 and ended with the implementation of the share purchase agreement dated 24 November 2004, on 11 February 2005, which is considered as a fairly short period of time for a transaction of this size. By acquiring 50% of the shares of TEB Mali, BNP Paribas has acquired shares not only in TEB Bank, but also in financial subsidiaries of TEB Mali namely, TEB Yatırım, TEB Leasing, TEB Factoring, TEB Sigorta, TEB Portföy Yönetimi and TEB NV, which is a bank established in Amsterdam pursuant to Dutch Laws. One remarkable aspect of this transaction was that the Turkish Capital Markets Board exercised its discretion and exempted BNP Paribas from a mandatory tender offer requirement for TEB Bank and, thereby, might have created a precedent for future deals significantly decreasing costs of transactions.
Prospects for 2005
While Italy's Banca Intesa SpAs repeated attempts to take on a majority stake in Turkey's fourth largest bank by assets under control, Garanti Bankasi A.Ş., in 2001 and later on in 2003 were seen as a move that signaled increased foreign interest in Turkeys financial sector, the later failure of Intesas negotiations with Garantis controlling shareholder Dogus Group due to unsurmountable divergences on the valuation of the bank in the light of changing market conditions seemed to eliminate hopes that a large-scale deal would be possible in Turkey.
The successful closing of the TEB Bank deal by French BNP Paribas and the coup landed by the Turkish-Italian joint venture Koç Unicredito with the acquisition of Yapı Kredi, making Koç Unicredito the third largest banking group in Turkey by assets under control, fuels expectations that Turkish banks and their shareholders will be able to pull off further major transactions in 2005. These deals together with public disclosures made by other top ten Turkish banks such as Dışbank and Finansbank, the former controlled by the Doğan group and the latter controlled by businessman Hüsnü Özyeğin, stating that they are considering strategic partnerships with foreign investors are strong indications that the interest of international players in the Turkish financial sector as a whole including banks, insurance, intermediary institutions, leasing and factoring companies has already reached a level that makes further acquisitions likely. Intentions to privatize the second largest state-owned bank out of Turkeys top ten banks, Vakıfbank, through an IPO and the high potential for deals in the Turkish financial sector promise that the year 2005 will be a very good year for deals despite early signs of overheating and contingent political risks.
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