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Cablegate: Banking Regulatory Update: Court Ruling

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

041212Z May 04

UNCLAS SECTION 01 OF 03 ANKARA 002490

SIPDIS


SENSITIVE


STATE FOR EB/IFD AND EUR/SE
TREASURY FOR OASIA - RADKINS AND MMILLS
NSC FOR MBRYZA AND TMCKIBBEN


E.O. 12958: N/A
TAGS: EFIN ECON TU
SUBJECT: BANKING REGULATORY UPDATE: COURT RULING
INVALIDATES BANK TAKEOVERS


1. (Sbu) Summary: On April 29 the Turkish Court of Accounts
reaffirmed its earlier decision overturning the bank
regulatory agency's 2001 takeover of Demir Bank and Kent
Bank. While the decision provides yet another example of a
questionable ruling by a Turkish court and damages the
credibility of bank regulators, bank regulatory officials
claim it will have little practical effect. Separately,
bankers continue to wrangle with regulators over the
IMF-sponsored draft amendments to the banking law tightening
bank ownership requirements. On state bank privatization,
though private banks are now offering lower consumer loan
rates than the state banks, the state-owned banks' role in
triggering the lower rates is counter to the state bank
privatization strategy agreed with the World Bank. End
Summary.


Court Ruling Deals a Blow to Bank Regulators...
--------------------------------------------- --


2. (Sbu) On April 29, the General Assembly of the Court of
Accounts (Danistay) reaffirmed its earlier decision to
invalidate the Bank Regulatory and Supervisory Agency's
(BRSA) 2001 interventions to transfer to the deposit
insurance fund Demir Bank and Kent Bank. The Danistay's
decision culminates a series of events which had greatly
troubled the IMF, bank regulators and other post economic
contacts. As a result of an earlier IMF reform, all bank
regulatory cases are heard in the first instance by the Tenth
Chamber of the Danistay, which has specialized expertise in
bank regulatory law. The Tenth Chamber had ruled against the
former owners, Halit Cingillioglu of Demir Bank and Mustafa
Suzer of Kent Bank. Upon appeal to the General Assembly of
the Danistay, which includes many judges with no expertise in
banking, the owners had obtained a ruling in 2003
invalidating the BRSA's actions in taking over the two banks
in 2001. In December, the BRSA wrote to the Danistay asking
them to review their decision. IMF Resident Representative
Odd Per Brekk told econoffs earlier this year that the IMF
was very troubled by the Danistay decision, and high-level
IMF officials had raised the issue with senior GOT officials.
Brekk even thought (hoped?) that the delay in the Danistay's
response to the BRSA might be signalling that GOT pressure
was causing the Danistay to back down.


3. (Sbu) Brekk's hopes were in vain, however, as the General
Assembly reaffirmed its ruling last week. Econoff met with
the BRSA lawyers handling the case, Umut Gurgey and Enes
Comez, and later with BRSA Vice President Ercan Turkan to get
their reaction. Turkan said it was a blow to the credibility
of the BRSA, and would only exacerbate public perceptions
that the BRSA takes unfair actions under pressure from the
IMF.


...But Has Little Practical Impact:
----------------------------------


4. (Sbu) However, Turkan and the BRSA lawyers said that, for
the time being at least, there is little practical
consequence to the Danistay decision. While the Danistay
decision gives the former owners the right to reapply for a
banking license, BRSA retains discretion whether or not to
award one. Turkan agreed with econoff that it would send a
bad signal for the BRSA to award a new license to either of
the former owners. The lawyers and Turkan also said the
Danistay ruling would allow Cinguoglu and Suzer to file new
cases requesting compensation from the BRSA for the value of
the seized banks. The BRSA officials noted, however, that
the owners would have to show there was value in the banks, a
difficult claim to prove given that the deposit insurance
fund (SDIF) had to inject significant funds to replenish the
banks' capital. Turkan doubted any Turkish court would rule
that a state agency should pay compensation for a regulatory
action.


What do the Former Owners Really Want?
--------------------------------------


5. (Sbu) Given this situation, it is not entirely clear what
the former owners really hope to accomplish. As a practical
matter, the BRSA lawyers and Turkan said that in neither case
can the former owners get their banks back: the SDIF has long
since sold Demir Bank to HSBC, and Kent Bank was merged into
the SDIF's main holding bank, Bayindir Bank. According to
the press, Deputy Prime Minister Abdullatif Sener made the
same point on May 3. One of the reasons that the IMF was so
concerned was that HSBC's purchase of Demir Bank was one of
the largest foreign investments in Turkey in recent years, a
rare bright spot in an otherwise bleak FDI picture.
Cingillioglu had filed a separate--reportedly even more
frivolous--suit against HSBC, which had HSBC management quite
concerned. Last week, Cinguoglu withdrew that case. Given
the situation, the BRSA officials speculated that the former
owners' main goal is to clear their names.


The Issue of Failed Bank Owners Continues to Reverberate:
--------------------------------------------- -----------


6. (Sbu) The Demir and Kent cases are only one manifestation
of the continued festering of issues relating to the former
owners of failed banks. As required under the IMF's Seventh
Review, in April the GOT finally named the head of a
commission to investigate the Imar Bank fiasco. The GOT has
chosen a French former Central Banker, Jean-Louis Fort, to
lead the Commission, as well as a British former central
banker and IMF official, Peter Hayward. Though the Turkish
members of the commission have not yet been named, the local
press is reporting that Fort is beginning work. Turkan told
us the commission has until August to submit its findings.


7. (Sbu) The saga of the Cukurova Group's dealings with bank
regulators, over its ownership of Yapi Kredi Bank (and its
former ownership of SDIF-intervened Pamuk Bank) continues.
Though BRSA Chairman Bilgin (at the time also SDIF Chairman)
had rejected in January Cukurova's proposal for a
restructuring of the group's debts to the SDIF to cover
Cukurova group loans to the banks, now Turkan confirmed press
reports that Cukurova continues to talk to BRSA. Turkan
himself is not involved so he was not sure exactly what
exactly his fellow BRSA V.P.--and Bilgin protege--Dawaz was
talking to Cukurova about. Turkan agreed with Econoff that
the "fit and proper" criteria of the bank law, which
prohibits owners of banks that have failed to hold banking
licenses, would seem to disqualify Cukurova owner Mehmet
Karamehmet from reasserting control of Yapi Kredi. In other
words, Karamehmet's prior ownership of the failed Pamuk Bank
would appear to disqualify him from owning any other bank,
including Yapi Kredi. Turkan surmised that Cukurova's talks
with regulators may have to do with restructuring his debt,
rather than resuming ownership. Comment: In this case, it
would be more appropriate for Cukurova to be talking to SDIF,
to whom the debt is owed, than to BRSA, which is responsible
for licensing. End Comment.


8. (Sbu) As required under the IMF's Seventh Review, the GOT
is working on amendments to the Banking Law in consultation
with the Bankers Association. Among the amendments are
provisions to tighten ownership requirements, expand on-site
inspection to experts other than the sworn auditors, and to
delineate the relative duties and responsibilities of the
now-separate BRSA and SDIF. Turkan said that the proposed
tightening of ownership requirements is proving to be a
contentious issue with the Bankers Association, since it
would ban foundations or owners of media groups from owning
banks. The latter provision would require the Dogan Group,
with its extensive media properties, to divest itself of
Disbank. Turkan wondered whether it would not make sense to
grandfather existing bank ownership, or to allow a transition
period for compliance. He said that the law had been drafted
by the previous management of BRSA and that the current
management and the government had not yet taken a clear
position.


State Bank Privatization:
------------------------


9. (Sbu) Though the BRSA is not directly involved with the
GOT's negotiations with the IFI's on a State Bank
privatization strategy, Turkan updated us on earlier reports
that state-owned Ziraat had aggressively undercut
privately-owned banks by lending to consumers at a 1.9
percent monthly rate when the market was at 2.00 percent. In
a meeting in March with econoffs, Ziraat CEO Can Akin Caglar
insisted Ziraat had the right to take actions such as this
that would increase its loan portfolio, thereby directly
contradicting what World Bank economist Rodrigo Chavez had
told us about the strategy. Now, in May, Turkan told us
Ziraat's consumer loan rate has now been matched and
surpassed by two private banks: Akbank and HSBC. Turkan
agreed, however, that Ziraat's action in triggering the lower
interest rate was troubling. Bankers Association Secretary
General Ekrem Keskin told econoff that he believes the State
Banks' aggressive lending is no accident: the government
wants the State Banks to extend credit. Separately, On April
19, Ziraat announced a whopping profit of 1.072 quadrillion
TL (USD 765 million), up from only TL 178 trillion in 2002,
on the strength of huge profits in Ziraat's outsized
government securities portfolio.


Consumer Loans, Overheating and the Resource Utilization Tax:
--------------------------------------------- ---------------


10. (Sbu) According to press reports, Government officials
continue to be concerned about potential overheating to the
economy from exploding consumer and credit card loans. On
May 4, the press reported that an interagency meeting of
officials had decided to recommend that the Resource
Utilization Tax on consumer loans, currently 10 percent, be
increased to 20 percent. The press also reported, however,
that Deputy Prime Minister Sener denied the GOT was
considering increasing the Resource Utilization Tax. Deputy
Undersecretary Birol Aydemir had told econoff a month ago
that he was quite concerned about overheating and had pressed
the IMF to allow for an increase in the Resource Utilization
Tax on consumer loans. As Odd Per Brekk later confirmed to
us, the IMF had refused because increasing the tax went
against the thrust of IFI efforts to reduce bank
intermediation costs. In the meeting with the BRSA's Turkan,
who played a role in highlighting the problem of the high
costs of bank intermediation, he thought the overheating
issue was legitimate and that it might be reasonable to
temporarily raise the Resource Utilization tax if it was
limited to consumer loans.
EDELMAN

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