In the IMF letter of intent dated 26 April 2005, the Turkish Government undertook to introduce a new banking law that further improves the supervisory and regulatory framework of the sector. The Parliament first approved the new banks act on 2 July 2005. Although President Sezer previously exercised his veto right against three provisions of the new act, the Parliament passed it on 20 October 2005 without any amendments at all.
The Banks Act No. 5411 (“Law No. 5411”)introduces major novalties for the Turkish banking system. Nevertheless, many of these novalties were long discussed during the drafting stage of Law No. 5411, including in the working papers of the Banking Regulation and Supervision Agency (“BRSA”) in previous years, and therefore, were expected and well known by the market. The novelties of Law No. 5411 can be summarized as follows.
Financial Holding Companies
The reasoning of Law No. 5411 points out that distinction among various financial services has nearly faded and it has become common practice to offer financial services as a whole package. It is further emphasized in the reasoning of the law that, corporate structures like financial holding companies, which provide a full range of different financial services such as banking, insurance and securities trading, have gained major importance in the world economy. Law No. 5411 defines financial holding companies as “holding companies holding interest in financial institutions, at least one of which is a bank or a special finance institution”1 and provides that the BRSA will be authorized to determine the scope of a financial holding company’s activities and further to dictate a group to be structured as a financial holding company. With the recent amendments, financial holding companies will be subject to Law No. 5411 and to the BRSA’s regulations regarding capital adequacy, risk management, intra-group transactions, internal audit/monitoring mechanisms.
BRSA’s Regulatory Scope
The reasoning of Law No. 5411 states that liberalization and integration of financial markets urged the regulatory authorities to reconsider their status. It is stated that financial crises in Norway, Finland and Sweden in early 1990s were the first instances that brought up the question as to whether only one financial regulatory authority, which monitors and supervises all financial institutions, is necessary. Again, placing emphasis on the nature of financial services provided by various financial institutions and their shareholding structures, it is stated in the reasoning of the law that the recent trend is to have one regulatory authority. Following this approach, according to Law No. 5411, the authority to monitor and supervise (i) non-bank financial institutions (i.e., financial leasing companies, factoring companies and consumer financing companies), which were previously regulated and monitored by the Undersecretariat of Treasury; (ii) other institutions in the financial sector to be determined by the BRSA; and (iii) companies providing support services to such institutions will be transferred to the BRSA.
In one of its recent public announcements the BRSA stated that in order to (i) ensure continuance of confidence and stability in the financial markets; (ii) ensure cooperation and coordination among authorities; and (iii) make common policy suggestions and to render opinions on issues that will affect the future of the finance sector, a commission called the “Financial Sector Commission” would be established by the BRSA with the participation of representatives from Ministry of Finance, Undersecreteriat of Treasury, Central Bank, Capital Market Board, Savings Deposit Insurance Fund, Competition Board, State Planning Organization, İstanbul Gold Exchange, Stock Exchanges, Futures and Options Exchange and relevant business associations. The same is reflected in Law No. 5411, where it is provided that the Financial Sector Commission will convene at least once every six months and inform the Council of Ministers on the outcome of the meeting. The BRSA will be responsible for determining the working procedures and principles of the Financial Sector Commission after obtaining the views of the relevant member authorities.
Effective Supervision
In the IMF stand-by letter, the Turkish government has undertaken to strengthen the BRSA’s supervision. It is further stated that the BRSA will publish a list of actions it will take in order to strengthen its organizational structure, coordinate on-site and offsite supervision, and enhance the effectiveness of its staff together with a timetable for their implementation. In one of its recent public announcements the BRSA stated that Law No. 5411 aims to amend the current legal system to meet the requirements of the dynamic nature of the sector, and to establish a regulatory and supervisory structure that is in compliance with the EU norms and international standards. In this public announcement, the BRSA also stated that it will launch the “Risk Focused Supervision Project” and that within two months following the enactment of the new law, a new regulation will be introduced on the BRSA’s establishment and working principles to ensure more effective, flexible and proactive supervision.
Law No. 5411 has detailed provisions enabling the BRSA to conduct on-site inspections allowing it to engage independent experts for the process.
Cooperation Between the BRSA and the Savings Deposit Insurance Fund (“SDIF”)
Prior to 26 December 2003, the SDIF was represented and managed by the Board of the BRSA, which made the SDIF a legal entity under the BRSA’s control. With the amendments introduced, the SDIF has become a completely autonomous agency managed and represented by its own board and the authorities of the Board of the BRSA relating to the SDIF were transferred to the SDIF’s own board.
Law No. 5411 introduces a new commission named the “Coordination Commission”, the members of which will comprise the representatives of the SDIF and the BRSA. This commisssion will be established to share information among these two regulatory authorities relating to the general status of the banking system, measures that need to be taken as a result of the inspections and certain financial information of banks.
Basel II
Law No. 5411 has no provisions relating to technical issues regulated under the Basel II accord. The reasoning of the Law has explicit indications that the secondary regulation to be issued by the BRSA will regulate in detail the adoption of Basel II accord and the transition period.
Corporate Governance
The reasoning of Law No. 5411 states that recent bank failures are due to lack of application of corporate governance principles. It is further noted that unlimited management rights of controlling shareholders caused the use of banks’ resources in an inefficient manner and in wrong investments, which lead to the misuse of deposit holders’ funds and damages to minority shareholders. Therefore, it is important to establish and develop a strong corporate governance structure, process and principles in order to avoid similar crises and to regain public confidence in the system.
Law No. 5411 has a separate section regarding corporate governance. Although the scope and limit of corporate governance principles have not been determined yet, the law states that the BRSA will consult with the Capital Markets Board and relevant institutions to determine corporate governance structure, process and principles. In fact, one may understand the priority given by the BRSA to corporate governance by merely reading various provisions of Law No. 5411, which stipulate compliance with corporate governance principles as a factor to grant certain permissions and to determine compliance with requirements of the law. Among others, the BRSA is authorized to determine different minimum capital adequacy ratios for a bank or a group by also taking into consideration the bank’s compliance with corporate governance principles. Compliance of banks with corporate governance principles will also be taken into consideration while granting permission to open branches or for cross border activities.
Apart from the foregoing, Law No. 5411 also imposes certain new and important obligations on banks, including (i) to realize their capital increases through cash commitments and not through revaluation funds, except for permitted funds; (ii) to disclose their articles of associations and annual activitiy reports (which will include information on the bank’s management, organisational structure, human resources, activities, financial status, management evaluation and prospects, financial statements, summary of board of directors’ resolutions and independent audit reports) on their web sites; and (iii) not to make donations over the threshold stated in the Law.
Law No. 5411 is a detailed piece legislation, aiming to provide an improved regulatory framework in compliance with EU directives and international standards.
Footnotes
1 Previously referred to as ÖFKs and with the new definition in the law, as participation banks.
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