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Viewing cable 03ANKARA7541, MEETING WITH BRSA VICE PRESIDENT

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Reference ID Created Released Classification Origin
03ANKARA7541 2003-12-09 14:55 2011-08-24 01:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Ankara
This record is a partial extract of the original cable. The full text of the original cable is not available.

091455Z Dec 03
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