Cablegate: Meeting with Bank Regulatory Board Chairman

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

161433Z Jun 04





E.O. 12958: N/A


1. (Sbu) Summary: Bank Regulatory Board (BRSA) Chairman
Tevfik Bilgin told econcouns June 14 that his priority is
preparation for the lifting of the blanket guarantee on
deposits July 5, specifically monitoring to ensure there is
no flight of deposits from private to state-owned banks.
Bilgin revealed that coordination between newly-separated
SDIF and BRSA is not working smoothly. He implied that the
Cukurova group had worked out a tentative deal to restructure
its debt payments to the Deposit Guarantee Fund (SDIF) but
that the SDIF and BRSA boards would have to approve. He
explained that the deal would build in incentives for
Cukurova to sell its Yapi Kredi shares quickly. End Summary.

Lifting the Blanket Guarantee on Deposits:

2. (Sbu) In a June 14 farewell call by Econcouns, Bilgin said
his priority is to be sure the banking sector is ready for
the lifting of the blanket guarantee on deposits July 5.
Note: The lifting of the blanket guarantee is a long-awaited
reform, designed to reduce the moral hazard of the state's
unlimited guarantee on deposits, limiting it to TL 50 billion
(about $33,000) per account. End Note. Bilgin claimed the
sector was ready but required careful vigilance by
regulators, as banks--especially the smaller private
banks--need to be ready for a possible flight to quality.
The regulators are therefore urging these small banks to
strengthen their liquidity positions, which of course, cuts
into their profits. Given the risk of flight from private to
state-owned banks arising from the implied state guarantee
inherent in the state ownership, Bilgin said state banks are
keeping their deposit rates lower than private banks. Note:
As reported earlier, under the IFI-agreed state bank
privatization strategy, the state banks are supposed to keep
their deposit rates no higher than private banks' rates on a
risk-adjusted basis. End Note. Bilgin said that the state
banks need to be ready to further lower their deposit rates,
if needed.

Banking Law:

3. (Sbu) Bilgin revealed that the new banking law, in the
end, did not prohibit owners of banks from also owning
foundations or media outlets. Bilgin explained that the BRSA
had asked other OECD countries about their practices, and
found that none had these kinds of prohibitions in their
banking laws, though some had similar bans in their press
laws. Bilgin said the key is good supervision, which the
banking law addresses. Among other features, he cited the end
of the sworn auditor's monopoly of on-site inspection, to
allow IT experts, for example, to join these inspections. He
agreed that allowing IT experts to join on-site audits was a
result of the on-site inspectors' failure to catch Imar
Bank's use of fraudulent systems. Bilgin confirmed that
passage of the Banking Law would be delayed until September
or October.

BRSA-SDIF Coordination:

4. (Sbu) When asked about how BRSA-SDIF coordination is
working now that the two boards are separate and SDIF has
moved to Istanbul, Bilgin revealed that it is not going well.
Without going into detail, his expression and body language
suggested the coordination was far from smooth. Note: One
of the key components in the banking law, required under the
GOT's IMF and World Bank programs, was for the law to spell
out in detail the respective roles and responsibilities and
coordination mechanisms for SDIF and BRSA. End note.

Cukurova Deal:

5. (Sbu) On June 4 press reports of agreement between
regulators and Cukurova on a long-rumored deal were
subsequently denied by SDIF and BRSA. The Capital Markets
Board subsequently launched an investigation of possible
market manipulation. Bilgin said he believes the first
report was a deliberate move by speculators in Yapi Kredi
stock. As for the status of regulators' discussions with
Cukurova, Bilgin said any deal would still have to be
approved by the SDIF board and then by the BRSA board. Since
Bilgin then went into some detail about the structure of a
possible deal, he seemed to imply that negotiations were at
an advanced stage. Mentioning that the deal would reduce the
maturity of Cukurova's payment plan from 15 years to two
years, Bilgin said the key issue for the SDIF board was the
Net Present Value (NPV) of the deal and the interest rate
used for the NPV calculation. Note: The NPV is important
because Cukurova should not be getting a better NPV than
previously-agreed to. End Note. Bilgin, who rejected an
earlier deal with Cukurova in January, said the key issue for
BRSA is that Cukurova and its owner, Mehmet Karamehmet, not
be allowed back into the banking sector.

6. (Sbu) According to Bilgin, the tentative deal would not
allow Cukurova back into banking, but would build in
incentives for it to find a buyer for Yapi Kredi Bank as
quickly as possible. He said it was important to resolve the
issue because Yapi Kredi represents 10 percent of the banking
sector (and Bilgin had earlier admitted that the uncertainty
created by the situation with Cukurova was eroding Yapi
Kredi's value). Note: Cukurova group companies currently own
40.7 percent of Yapi Kredi's shares, with another 12.9
percent, formerly held by the intervened Pamuk Bank, now held
by SDIF. 41.6 percent are quoted on the Istanbul Stock
Exchange. End Note. Bilgin also admitted he was anxious to
solve this before the lifting of the blanket deposit
guarantee July 5.

7. (Sbu) According to Bilgin, the incentive for Cukurova to
find a buyer for its Yapi Kredi shares was that, if anything
happens to Yapi Kredi, Cukurova would be exposed to the
December 2003 law enabling SDIF to go after assets of owners
of failed banks and their families--the law that SDIF used to
seize all Uzan group companies earlier this year. SDIF,
after seizing the Turkcell shares, could go after Cukurova
group--and Karahmehmet family--assets, because the Turkcell
shares were not of sufficient value to cover all of
Cukurova's liabilities to Yapi Kredi. Under the tentative
deal, Bilgin said the Turkcell shares would be released in
proportion to the loan payments by Cukurova, however, for
each monthly $100 million-odd payment only about 70% of this
amount in Turkcell shares would be released. Bilgin said
this would keep the pressure on Cukurova to sell its Yapi
Kredi shares.

8. (Sbu) Another issue that BRSA will have to closely
scrutinize, according to Bilgin, is the source of Cukurova's
financing of the accelerated payments. In the earlier deal
Bilgin rejected, Cukurova had floated a plan to finance the
deal from a mysterious offshore company called North
Petroleum. Now, Bilgin said the financing source is still
not clear. He hopes the money will come through Citigroup
and HSBC, because that would provide some confidence that
these banks and their home country regulators will be
applying a high standard of anti-money laundering practices.

Demir and Kent Bank Cases:

9. (Sbu) Bilgin continues to worry about the potential
ramifications of the court decision in favor of the former
owners of Demir and Kent Banks. BRSA has now received the
text of the court's decision which tracks with its earlier
decision, i.e. that the Central Bank effectively caused the
failure by cutting its lines of credit to Demir, and that the
BRSA should have given Kent Bank's owners more time to bring
the bank's capital up to required levels. Bilgin noted
former Kent owner Mustafa Suzer's comments to the press about
wanting his bank back. As he had said at an earlier meeting,
Bilgin said he fears that a BRSA rejection, if Suzer applies
for a license, would be overturned by the courts.


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