IMAR BANK UPDATE: IS IT FAIR TO BLAME BRSA?

C O N F I D E N T I A L SECTION 01 OF 02 ANKARA 006377 SIPDIS STATE FOR E, EB/IFD, AND EUR/SE TREASURY FOR OASIA - JLEICHTER AND MMILLS NSC FOR MCKIBBEN AND BRYZA BUDAPEST FOR WILLIAM SUDMANN E.O. 12958: DECL: 10/09/2008 TAGS: EFIN PGOV TU SUBJECT: IMAR BANK UPDATE: IS IT FAIR TO BLAME BRSA? REF: A. ANKARA 4832 ¶B. ANKARA 5075 ¶C. ANKARA 5644 ¶D. ANKARA 6199 Classified by Economic Counselor Scot Marciel for reasons 1.5 (b) and (d). ¶1. (C) Summary: Post's banking contacts tend to defend BRSA, despite its failure to detect Imar Bank's problems. The bankers believe BRSA either could not have acted earlier due to the Uzans' power or could not detect the fraud becaus of its sophistication. ONE former bank inspector at the Central Bank, however, believes good inspection techniques should have uncovered problems. Some well-placed sources believe organizational weaknesses at BRSA may have played a role. End Summary. ¶2. (Sbu) It is now clear that the Imar Bank case, both in quality and quantity, represents a massive failure of the Turkish bank regulatory and law enforcement systems. The cost of honoring the deposit guarantee to the Turkish Treasury is now estimated at USD 5.2 billion, or close to 3 percent of GDP. There may be other costs: there are press reports today of Imar owing TL 813 trillion in taxes which, with interest and penalties now amount to TL 6.5 quadrillion (USD 4.6 billion). Though the cost of honoring the deposit guarantee will be financed by issuance of new government debt rather than taken as an immediate hit to the budget, the Turkish state can ill afford this large addition to its debt burden. Qualitatively, the Imar Bank case is dramatic because BRSA so blatantly failed to catch the fraud until a very late stage, and because the Uzans were widely considered to be unethical for many years. The blue chip business organization, TUSIAD, for example, had never allowed the Uzans to join. Imar Bank is often on the front pages, and a series of investigations have begun: the criminal prosecution of Imar Bank managers and owners, parliamentary investigations, and an internal BRSA study of what went wrong and how to avoid such lapses in the future. It is striking, however, that a failure of this magnitude has not resulted in a greater outcry both to assign responsibility and to reform the system. Financial markets, for example, seem to have shrugged off the Imar Bank case, moving blithely forward despite revelations about the cost to the state. ¶3. (C) In part, the absence of a more intense uproar may be attributable to widespread resignation over corruption issues, but may have something to do with there being plenty of blame to spread around. The BRSA was only created two years ago, and before that bank supervision was weakened by political influence over the non-independent bank regulators at the Central Bank and Treasury. Neither of these agencies, nor the Capital Markets Board, nor the Telecom regulatory authority took meaningful action against the Uzans until late spring of 2003, though Capital Markets Board President Dogan Cansizlar insists he sent 70-plus Uzan-related files to the public prosecutor's office in the past few years. Still, having had the authority for two years now, and having recently given Imar a clean bill of health, a central question remains how fair it is to blame the BRSA for failing to spot fraud at Imar Bank. Bankers defend BRSA: -------------- ¶4. (C) In a series of meetings with econoffs in recent weeks, banking contacts have tended to defend BRSA, though admitting the Imar Bank case is a major failure. ONE theme is that despite BRSA's failure to catch fraud at Imar Bank in time, the case needs to be weighed against the BRSA's broader track record in cleaning up the banking sector. The Secretary-General of the Bankers' Association, Ekrem Keskin, SIPDIS said he was a defender of BRSA despite Imar Bank. He recalled the bad old days before BRSA when politicians meddled in bank regulatory decisions, in ONE case awarding a banking licence to a businessman who applied to set up a bank because banks had denied him credit. Sinan Gumusdis of JP Morgan/Chase, said BRSA was "set up" on Imar: "It's ONE thing to take over banks with weak balance sheets but another to take over a fraudulent operation, especially ONE with political support." ¶5. (C) Gumusdis' comment echoes BRSA Chairman Akcakoca's claims to econoffs, included in the BRSA's report to prosecutors, about the elaborate computer systems designed to hide the true accounts. These computer systems allegedly made Imar Bank's problems invisible to bank inspectors. BRSA's inspectors apparently had too narrow a focus, concentrating on traditional prudential issues such as capital adequacy, credit quality, asset-liability mismatches and foreign exchange exposure rather than searching for fraud. Some bankers have also alleged that before AK came to power in November, 2002, the politicans in power were unwilling or unable to go after the Uzans who had constructed a powerful network of influence. By this analysis, even though technically independent, BRSA could not have taken forceful action against the Uzans since the GOT would not have backed BRSA up. Former Bank Inspector Implies BRSA Should Have Known: -------------- -------------- ¶6. (C) On the other hand, Hakki Arslan, General Manager of the Central Bank's Banking Department and a former bank inspector, implied to econoffs that the BRSA on-site inspectors should have been able to detect the fraud, no matter how sophisticated the fraudulent systems. Had the inspectors simultaneously monitored accounts and activities at branches and the head office, they should have been able to detect the discrepancies between actual and reported deposits. Alleged Organizational Weaknesses at BRSA: -------------- ¶7. (C) BRSA has reportedly finished a draft of its internal study of what wrong. Contrary to press reports, Vice President Teoman Kernan told econoff that BRSA management is still working on the final version to be presented to the government. ONE current of thought is that organizational weaknesses and bureaucratic rivalries within BRSA may have contributed to its inability to detect the Imar problem. BRSA Vice President Fikret Sevinc chaired a committee that wrote a report on BRSA organizational issues in June, 2002. The report recommended that on-site and off-site inspectors be grouped to cover a given set of banks, in order to improve horizontal communication and pool knowledge on particular banks. The report also recommended mandatory frequent reports on each bank. Sevinc claims these changes were supported both by the World Bank and by U.S. Treasury technical advisors. ¶8. (C) Sevinc recently confided to econoffs that, although BRSA management acknowledged the need for these changes at the time, it failed to implement them. According to Sevinc, better communication between off-site and on-site inspectors might have helped with Imar Bank. The Bankers' Association's Keskin had a similar, if less critical view, explaining that the Sworn Auditors (on-site inspectors) have traditionally had bureaucratic frictions with the rest of BRSA. Keskin also felt that the appointment of people without sufficient banking expertise to senior positions at BRSA, particularly in the early days of the regulator's existence, had been a problem. GOT weighs Financing Plan: -------------- ¶9. (Sbu) The BRSA has proposed a financing structure, reportedly involving transfer of the deposits to state-owned Ziraat Bank, with Turkish Treasury financing the transfer with new government securities. The proposal currently lies with Turkish Treasury and has reportedly met with IMF acceptance. Today's press reports that Minister Babacan expects the GOT to announce the plan in a week or two, saying that the 300,000 accounts at Imar were being pored over one-by-one. EDELMAN