BANK REGULATOR'S HEADACHES

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 005644

SIPDIS


NSC FOR MCKIBBEN
STATE FOR E, EB/IFD/OMA, AND EUR/SCE
TREASURY FOR OASIA - LEICHTER AND MILLS


E.O. 12958: DECL: 09/04/2013
TAGS: EFIN ECON PGOV TU
SUBJECT: BANK REGULATOR'S HEADACHES


REF: A. A) ANKARA 4470

B. B) ANKARA 5075

C. C) ANKARA 5551



1. (U) Classified by Economic Counselor Scot Marciel for
reasons 1.5 (b) and (d).



2. (C) Summary: In a meeting with econoffs September 4,
embattled BRSA Chairman Engin Akcakoca described GOT
consideration of legislation that, if enacted in its current
form, would greatly reduce the independence of regulatory
bodies such as BRSA. However, Akcakoca predicted that only
one of the independence-reducing features will actually
survive. Separately, a World Bank economist said the IFI,s
would never accept the draft law as currently drafted.



3. (C) On the Imar Bank case, Akcakoca put the total sum of
questionable accounts at something on the order of TL 6.5
Quadrillion (USD 4.6 billion). The BRSA had found fewer
fictitious deposits than initially suspected, and for many
accounts, they lacked sufficient proof the deposits were
fictitious. End Summary.




Possible new Law on Independent Regulatory Bodies:
-------------- --------------



4. (C) In a September 4 meeting with econoffs, BRSA Chairman
Engin Akcakoca outlined the Government,s new effort to rein
in the independent regulatory bodies. Akcakoca opined that
the Government,s main target is BRSA. Comment: The Imar
Bank case has only ratcheted up Governmnent pressure on the
BRSA, including a meeting with Prime Minister Erdogan in late
August. End Comment. At the end of the meeting with econoffs,
Akcakoca joked about how much longer he would need to
complete his agenda, seeming to imply he was not leaving any
time soon.



5. (C) Akcakoca explained that he and the other regulatory
body heads had been convoked to a meeting that morning for a
consultation on the proposed new law. Akcakoca characterized
the meeting as a preliminary consultation to get regulatory
body heads, views. According to Akcakoca, the regulatory
body leaders had a very negative reaction to many of the
proposed provisions, and the proposed law failed to take into
account the differences between the functions of the various
regulatory bodies. Akcakoca,s personal prediction is that
several of the provisions will not survive into the final
version. These include a requirement that regulatory boards
get a government agency's (probably the State Planning
Organization's) approval prior to issuing to decrees, and
institution of a 60-day waiting period for all board actions
plus an additional 2 to 3 weeks before the actions would be
fully effective. Akacokca pointed out how inappropriate this
would be for a bank seizure. Most likely to survive,
however, is a provision that would allow the Government to
register in court its opposition to actions taken by
regulatory bodies, with courts then having the power to rule
whether the action was appropriate. Akcakoca said this would
be a significant, unhealthy change from the current system.



6. (C) Akcakoca did not detect any evidence of GOT
consultation with the IFI,s on the proposal. In a separate
meeting the same day, World Bank economist Jim Parks told
Econoff the Bank had managed to procure a copy of the draft
proposal, which he said would be completely unacceptable in
its current form.




Imar Bank:
--------------



7. (C) The criminal cases arising from Imar Bank are no
longer in the BRSA,s hands, according to Akcakoca, having
been turned over to prosecutors. The BRSA continues to
segregate good and bad accounts. Their latest estimate of
the total of unreported accounts referred to prosecutors is
on the order of TL 6.5 Quadrillion (USD 4.6 billion).
Akcakoca said the size of the deposit base the BRSA would
have to cover was larger than he had earlier thought for two
reasons: there were fewer fictitious accounts, and the BRSA
lacked sufficient proof of fraud to refuse to cover accounts
that might be fictitious. The BRSA can, however, decline to
cover accounts created by monies transferred to Turkey from
offshore accounts, notably from northern Cyprus. The cut off
date for new accounts to benefit from the SDIF (the deposit
insurance agency under the BRSA umbrella) guarantee probably
would be the date of the seizure of the Uzan group,s
electricity companies. Once these companies were seized, the
markets realized the weakness of the Uzans, financial
condition.



8. (C) Akcakoca marveled at the extraordinary sophistication
of the Imar fraud, requiring a cadre of 15-20 highly
qualified people to administer a complicated software program
that invisibly erased transactions from bank branches' daily
logs. Akcakoca claimed that the BRSA now had a pretty good
understanding of the liability side of Imar,s balance sheet
but continued to have problems reassembling the asset side.
In order to prevent future Imar-type cases, Akcakoca said he
has established an internal committee to analyze what went
wrong with BRSA,s surveillance and propose corrective
actions.



9. (C) The details of how the GOT and BRSA would finance the
intervention remain to be worked out. Under new legislation
the BRSA and Treasury have to jointly propose a financing
plan to the Council of Ministers. The BRSA has written a
draft but awaits Treasury,s comments. According to
Akcakoca, the IMF has proposed that the deposits would be
transferred to Ziraat Bank and then financed by government
bonds provided to Ziraat. Akcakoca said this approach was
used in a similar case in the Dominican Republic but in that
case the authorities had a much better fix on the accounts.
One issue that needs to be worked out is how much the GOT and
BRSA might make whole purchasers of government bonds sold by
Imar. Though BRSA/SDIF would normally only cover insured
deposits, there may be a need to cover purchasers in good
faith of government bonds sold by Imar. Akcakoca explained
that a refusal to cover bondholders could affect market
confidence in government bonds and, potentially, in the
banking system. To cover such bondholders would require a
new law, however.



10. (SBU) On the new law allowing the authorities to seize
assets of families of owners of failed banks, Akcakoca
confirmed that it is not retroactive, but the relevant date
is when depositors are paid, not when the bank was seized or
when fraud was committed. Therefore, the assets can be
blocked now, and once depositors are paid, the SDIF can seize
and dispose of the assets.



11. (C) Akcakoca said the BRSA is being careful to allow
Uzan-owned companies to continue functioning--within
guidelines--so as not to destroy their value before SDIF
sale.










EDELMAN