In the IMF Letter of Intent dated 7 July 2006, the Turkish Government stated that "the Banking Regulatory and Supervision Agency ("BRSA") shall continue to bring its supervision closer to best international practice. To this end, it has implemented the organizational changes envisaged in the Banking Law No. 5411 ("Law"), including the merger of onsite and offsite supervision. The BRSA has also adopted the other remaining measures set out in its October action plan, including new audit teams and further improvements in transparency and accountability. To come into line with Basel Core Principles, the BRSA will complete the drafting of supporting regulations for the Law by end August 2006."
Since June 2006, the BRSA has been issuing draft regulations in connection with the banking sector under the Law. The Law, which entered into force upon its announcement in the Official Gazette dated 1 November 2005, provides that the decrees, regulations and communiqués introduced pursuant to the Law will enter into force within one year. Accordingly, the decrees, regulations and communiqués that previously entered into force, in accordance with the former Banks Act No. 43891, would remain in force until being replaced by the BRSA’s new regulations. According to the Law, the deadline for introduction of the regulations expired on 1 November 2006. In line with this deadline, 23 regulations entered into force upon their announcement in the Official Gazette on 1 November 2006. These regulations were prepared in close dialogue with banks and will alter the banks’ working procedures and systems. The purpose of such regulations is to provide considerable development in the banking sector.
The BRSA aims to strengthen the banking sector and improve the supervision standards in line with international norms, through enactment of several regulations instead of collecting all the issues addressed under the Law in one general regulation as was the case with the Regulation on Establishment and Operations of the Banks, which had entered into force together with and pursuant to the abolished Banks Act No. 4389 ("Regulation"). The new regulations are relatively technical regulations that aim to enlighten provisions of the Law. The new regulations mainly focus on issues such as the principles and procedures for applications to be filed with the BRSA in connection with the granting of licenses for establishment of banks; opening of branches and representative offices for banks in Turkey; the transfer of controlling shares in banks; the transfer of indirect shareholdings in banks; mergers of banks; dissolution of banks; and the exchange of shares in banks. Furthermore, the new regulations set forth certain principles regarding, among others, corporate governance; risk management; liquidity; voluntary liquidation; and operations. Although it is not possible to categorize the new regulations into strict classes, there are three main groups: (i) regulations relating to corporate governance and shareholding structure of banks; (ii) regulations relating to financial matters; and (iii) regulations relating to the support and audit services of banks. There are also regulations regarding financial lease and asset management companies.
Technical details in relation to regulatory provisions are beyond the scope of this article. Having said that, based on the increasing interest in bank mergers and acquisitions involving Turkish banks, we will focus on some of the novelties introduced by the new regulations regarding M&As, as well as the corporate structure of banks.
Regulations Relating to Corporate Governance of Banks
The Regulation on Corporate Governance Principles of Banks sets out seven principles regarding the corporate values and strategic goals of banks, the duties and liabilities of the board of directors and the auditors of banks. This regulation also encourages greater transparency in banks as well as actively using their websites in order to inform third parties.
The Regulation on the Procedures and Principles regarding Notification of the Persons to be Appointed to the Executive Management of Banks, Taking Oath and Wealth Declaration and Keeping Resolution Books aims to set forth the procedures, principles and necessary documentation regarding appointment of the members to the board of directors, audit committees, credit committees and the senior managers of banks established within Turkey, as well as the board of managers (müdürler kurulu), audit committees and the senior managers in the managing headquarters of the branches of banks headquartered abroad. The said regulation requires more detailed documentation than the currently implemented Regulation.
The Regulation on Bank’s Operations subject to Authorization and Indirect Shareholding specifies the procedures and principles regarding banks’ operations subject to authorization and indirect shareholding. The activities and operations subject to authorization are listed as (i) establishment of a bank in Turkey; (ii) issuance of a certificate of activity; (iii) transfer and acquisition of shares in a bank headquartered in Turkey; (iv) capital increases; (v) opening of the first branch and representative office in Turkey of a bank headquartered abroad; (vi) opening of branches in Turkey of a bank headquartered in Turkey; and (v) opening of branches or representative offices, establishment of shareholdings or participation into the incorporated shareholdings abroad of a bank headquartered in Turkey. This regulation also aims to address the debate concerning the interpretation of the definition of indirect shareholding in a bank headquartered in Turkey, in accordance with Article 18 of the Law titled "Acquisition and Transfer of Shares". The unclarity in the wording of Article 18 of the Law has caused difficulties in the BRSA’s process of granting licenses to the applicant acquirers in connection with the recent share acquisitions by foreign banks. This regulation, among others, clarifies that the indirect transfer of title of the shares of legal entities, which hold shares in a bank, to be made in accordance with the Banking Law, and the other determinations and assessments regarding the indirect shareholding will be based on the capital of the legal entity shareholder instead of the bank’s capital.
The Regulation on the Internal Audits of Banks introduces the terms ‘executive’ and ‘non-executive’ members of the board of directors, which is different from the previous Regulation on Internal Audits and Risk Management Systems. While the executive unit of a bank is defined as the unit that performs activities generating direct income, the non-executive members of the board of directors is defined as the members to whom no executive unit is reporting.
The Regulation on Credit Related Activities of Banks sets forth the principles and procedures regarding granting loans, establishment of the credit committee, and the eligibility and criteria for the members of the board of directors to be appointed to the credit committees.
Regulations Relating to Financial Matters of Banks
The regulations that may be discussed under this category are, among others, (i) Regulation on Shareholders’ Equity in Banks; (ii) Regulation on Donations by Banks and its Consolidated Companies; (iii) Regulation on Procedures and Principles in connection with Accounting Applications and Keeping Documents of Banks; (iii) Regulation on Measuring and Evaluating Liquidity Adequacy of Banks; and (iv) Regulation on the Procedures and Principles Regarding Preparation and Publication of Annual Activity Reports.
As noted above, the BRSA has also prepared regulations concerning financial leasing, factoring and financing companies, which set forth the corporate governance principles and procedures for these companies. The Regulation on the Establishment and Operation of Financial Lease, Factoring and Finance Companies entered into force upon its announcement in the Official Gazette dated 10 October 2006. In addition, the Regulation on Financial Holding Companies, which entered into force on 1 November 2006, regulates the scope of financial holding companies and the restrictions applicable to it. Another noteworthy regulation in this respect is the Regulation on Procedures and Establishment of Principles and Operations of Asset Management Companies.
Regulations Relating to Supporting Services of Banks
There are also regulations in relation to supporting services that will be outsourced by banks such as the Regulation on Revaluation Services of Banks, the Regulation on Supporting Services of Banks, and the Regulation on Authorizing Institutions to Make Independent Audits of Banks and its Activities.
With the introduction of these new regulations, the BRSA has proved both its willingness to adhere to the government’s undertakings, and its determination to enhance the banking sector.
1. The Banks Act No. 4389 entered into force upon the announcement in the Official Gazette on 23 June 1999, and abolished by the enactment of the Law