Cablegate: Meeting with Brsa Vice President

This record is a partial extract of the original cable. The full text of the original cable is not available.

091455Z Dec 03





E.O. 12958: N/A

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

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

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

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.


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