MEETING WITH BRSA VICE PRESIDENT

UNCLAS SECTION 01 OF 02 ANKARA 007541 SIPDIS SENSITIVE STATE FOR E, EB/IFD, AND EUR/SE TREASURY FOR OASIA - JLEICHTER AND MMILLS NSC FOR MBRYZA AND TMCKIBBEN E.O. 12958: N/A TAGS: EFIN ECON PGOV TU SUBJECT: MEETING WITH BRSA VICE PRESIDENT REF: A. ANKARA 7494 ¶B. ANKARA 7417 ¶1. (Sbu) Bank Regulatory and Supervisory Agency (BRSA) V.P. Ercan Turkan struck a surprisingly conciliatory note on the Government's idea of separating the BRSA's board from the Deposit Guarantee Fund's. However, he described morale at BRSA as "below zero." Turkan saw GOT commitments to remove the stamp duty on financial transactions, combined with the introduction of inflation accounting, as a good start on the problem of bank intermediation, though it will require a long-term effort. The GOT is reportedly considering merging Pamuk Bank into Halk Bank. End Summary. Separating the Deposit Guarantee Fund from BRSA: -------------- --- ¶2. (Sbu) Econoffs met with BRSA Vice President Ercan Turkan on December 5. Turkan, who had been promoted by former BRSA Chairman Engin Akcakoca, and had harshly criticized GOT investigations of BRSA V.P. Teoman Kernan, took a surprisingly conciliatory stance on the recent GOT proposals to create a new board for SDIF, the deposit guarantee fund. Under the GOT's draft legislation, the new, separate SDIF board would have two members appointed by Treasury, two by Finance, one by the Deputy Prime Minister, one by Justice and one by the BRSA. (Note: Since the new board would have different members than the BRSA board, the change in the law would allow the GOT to appoint a new board, most likely consisting of people closely allied with the current government. End Note) Saying something needed to be done to restore BRSA and SDIF credibility, since neither ordinary Turks nor politicians could understand how BRSA missed the Imar Bank fraud, Turkan pointed out that Turkey is the only country with all four bank regulatory functions under one roof. In Korea, Japan and Canada, for example, there are four different bank regulatory institutions: one each for bank regulation and supervision, deposit insurance, asset management and bank restructuring. He went on to point out that the BRSA/SDIF arrangement is only three years old and may need to be adapted based on experience. In addition to a clearer separation of BRSA and SDIF, Turkan said he would not be surprised to see an internal reorganization within BRSA. (Comment: As reported in ref A, IMF staff have also accepted the idea of separating the BRSA and SDIF boards. End Comment.) BRSA Staff Morale "Below Zero": -------------- ¶3. (Sbu) Turkan has had only a brief courtesy meeting with newly-appointed BRSA Chairman Tevfik Bilgin, because Bilgin has been heavily involved with GOT efforts to move the BRSA-related legislation through parliament. Turkan noted Bilgin's experience as a sworn auditor and banker, but also noted his relative youth at 37. Turkan characterized current morale of BRSA staff as "below zero," following the resignations under pressure of Chairman Akcakoca and two Vice Presidents in recent months. Turkan said there are now 24 different legal cases against Akcakoca. For this reason, Turkan said no one will sign anything for fear of being prosecuted later. Part of the problem, according to Turkan, is that the politicians cannot understand why they are paying so heavily for bank restructuring. Earlier governments created the problem over 20 years, and now Turkey is paying for it. Turkan proudly pointed out, that since the creation of the BRSA, no new banks had been licenced. The politicians also created unrealistic expectations about asset-recovery rates, according to Turkan: the recovery rate on assets of failed banks is well below international norms of around 30 percent, and near zero at state-owned banks that were taken over. Reducing Bank Intermediation Costs: -------------- ¶4. (Sbu) Turkan struck a cautiously positive note on GOT efforts, working with the Bank and Fund, to reduce Bank intermediation costs starting in 2004. Though Turkan saw the need for a long-term effort, the introduction of inflation accounting and the removal of the stamp duty are good first steps. Between these two measures, Turkan estimated that banks will pay 30 percent less corporate income tax in 2004. The stamp duty also has the effect of driving transactions offshore. In mid-2004, depending on the fiscal situation, the GOT also plans to remove the bank insurance tax, currently 3 percnt of interest on loans and 10 percent on consumer credits. ¶5. (Sbu) Turkan cited statistics demonstrating the relative underdevelopment of Turkey's banking sector: Bank credits were only 24 percent of GDP, compared to 73 percent in Greece and between 160 and 170 ercent in the EU. The contrast was less dramatic in asset-to-GDP ratios, because Turkish banks' large government securities portfolios caused larger balance sheets. With interest rates declining and economic growth creating opportunities, there is a real possibility that Turkish banks will increase their traditional banking activities, but Turkan cited continuing obstacles to this scenario. The first obstacle is funding costs because of high interest rates. The second is problems of legal procedure, specifically the ability of banks to collect assets in bankruptcy proceedings. The recently-passed bankruptcy law should help but it has not been implemented yet. There is also talk of creating a Chapter 11-style proceeding. Turkan cited weaknesses in corporate governance as a third obstacle, noting that banks cannot rely on indpendent auditors' assessments of corporate balance sheets. Since the banks cannot rely on companies' statements, lenders rely excessively on collateral to mitigate credit risks. ¶6. (Sbu) Turkan also noted that the current tax and regulatory framework helps to drive loans offshore, to the detriment of the Turkish banking sector. The lack of confidence in balance sheets of Turkish entities leads international banks with operations in Turkey to rely too heavily on parent guarantees for multinationals' Turkish operations. Another provision limiting local lending, according to Turkan, is that fixed rate loans are not allowed, except to exporters. Consequently, Turkan was not surprised at the large numbers of loans from abroad to Turkish banks and corporations in recent months: so far in 2003 syndicated loans from abroad have totaled between USD 3.5 and 3.6 billion with an additional USD 525 million in securitized loans and USD 100 million from the IFC. Pamuk, Halk and Ziraat Banks: -------------- ¶7. (Sbu) Turkan noted that the need for a Treasury injection to BRSA-intervened Pamuk Bank arises from the gap between Pamuk's total assets and liabilities that needs to be filled prior to Pamuk's sale. In order to avoid the injection, Turkan said that the GOT is considering merging Pamuk into state-owned Halk Bank, though Treasury would still have to provide government securities to Halk Bank that make up for the gap. Turkan said there could be a synergy between the two institutions--Pamuk Bank has strengths in technology, the quality of its personnel and consumer credit--all of which could help Halk Bank. More broadly, Turkan commented that state-owned Halk and Ziraat Banks had good liquidity but too many government securities. In the past these institutions made too many loans to politically-connected borrowers. Comment: The idea of merging Pamuk into Halk Bank raises concerns that a) that such action could add to delays in the snail-like process of privatizing Halk Bank, and b) it's the opposite of privatization in that it makes a private bank public. As it is, many local observers doubt there will be buyers for Halk. Weighing Halk down with Pamuk is likely to make the privatization process that much harder. End Comment. EDELMAN