US embassy cable - 04ANKARA763

C O N F I D E N T I A L SECTION 01 OF 04 ANKARA 000763 
 
SIPDIS 
 
 
STATE FOR EB/IFD, EUR/SE 
TREASURY FOR OASIA - JLEICHTER AND MMILLS 
NSC FOR MBRYZA AND TMCKIBBEN 
BUDAPEST FOR SUDMANN 
 
 
E.O. 12958: DECL: 01/19/2009 
TAGS: ECON, PGOV, TU 
SUBJECT: ROCKY TRANSITION AT BANK REGULATORY AGENCIES AS 
BANKS FACE A CRITICAL YEAR 
 
 
REF: ANKARA 464 
 
 
 CLASSIFIED BY ECONOMIC COUNSELOR SCOT MARCIEL FOR REASONS 
1.5 (B) AND (D). 
 
 
1. (C) Summary: Following the resignation of former BRSA/SDIF 
Chairman Akcakoca and the passage of legislation separating 
the two bank regulatory institutions, these agencies are in 
transition to new management and a new structure. By all 
accounts, it is shaping up as a difficult transition, with 
most management being replaced, doubts about the quality of 
the new people, and open questions regarding coordination 
between the newly-separated agencies.      IMF staff and 
other post contacts are concerned, both about the disarray at 
bank regulatory agencies and other banking sector issues, 
such as the absence of progress towards state bank 
privatization.  Many post contacts also expressed concern 
about the timing of these problems, given the likelihood that 
2004 will be a critical year for the still-vulnerable banking 
sector as interest rates and inflation fall. End Summary. 
 
 
2004 Expected to be Critical Year for Banking Sector... 
--------------------------------------------- ---------- 
 
 
2. (Sbu) 2004 is shaping up to be a critical year for Turkish 
banks.  Many of post's banking contacts agree that the 
sector, though far less vulnerable than it was at the time of 
the 2001 crisis, is not out of the woods.  Though banks now 
meet capital adequacy requirements, particularly after a 
profitable 2003, much of their capital is tied up in real 
estate and loans to group companies.  Moreover, as several 
Istanbul bankers and analysts confirmed to econoffs, 
banks'--especially state-owned banks'--profitability largely 
derives from their massive holdings of government securities. 
 Current capital adequacy rules encourage banks to hold 
government securities because, unlike loans, these securities 
require no capital allocation. Turkish Bankers Association 
Secretary General Ekrem Keskin said that banks are 
 
SIPDIS 
effectively subsidizing their unprofitable loan business with 
profits from government securities. 
 
 
3. (Sbu) With inflation and interest rates falling sharply, 
and projected to fall into the teens in 2004, there is 
widespread concern bank profitability will fall. Policymakers 
hope that banks will put greater emphasis on developing 
traditional banking activities.  Central Bank Vice Governor 
Sukru Binay told econoffs he is working with the accountants 
association to try to get small and medium-sized businesses 
to develop audited financial statements to facilitate access 
to bank credit.  But several bankers and one regulator told 
econoffs that there is limited room for growth in corporate 
lending given unreliable financial statements, the relative 
absence of good credits, and a tax and regulatory regime that 
inhibits loan growth.  Though Keskin praised the GOT's 
elimination of the stamp duty as part of an IFI-inspired 
campaign to reduce intermediation costs, these costs remain 
high, inhibiting loan growth and driving transactions 
offshore. Consumer and credit card loans have shown strong 
growth in late 2003, but corporate loan growth is weaker. 
Economist and Yapi Kredi Bank board member Hassan Ersel told 
econoff loan growth is weak enough to be a potential 
constraint on GDP growth. 
 
 
4. (C) Binay, some Istanbul analysts, and Treasury domestic 
debt management official Volkan Taskin, have all told 
econoffs that banks are incurring asset-liability mismatches, 
both in terms of currency and maturity, though Taskin said 
the mismatches were within the limits allowed by regulators. 
In other words, low-interest rate foreign currency deposits 
are being used to fund high-interest rate TL government 
securities, and short-term deposits are also being used to 
fund long-term Eurobond holdings.  Though many of these same 
contacts pointed out that the banking system's huge foreign 
currency-denominated deposits (USD 45 billion) could help 
Turkey weather a sharp fall in the exchange rate, a market 
correction could cause problems in the banking sector as 
banks take sudden losses on their positions. 
 
 
..Yet Banking Reforms Have Stalled 
---------------------------------- 
 
 
5. (C) Meanwhile, the IFI's are frustrated over stalled 
banking sector reforms.  IMF Deputy Resrep Christoph Klingen. 
 Klingen told us recently that the IMF and World Bank banking 
experts were wondering whether they were "back to square one, 
or at minus one."  Given the lack of progress on a range of 
banking sector issues, the IFI's are rethinking their 
strategy. 
 
 
Rocky Transitions at Bank Regulatory Agencies 
--------------------------------------------- 
 
 
6. (C) First and foremost among IFI and other contacts' 
concerns are the management changes at the newly-separated 
bank regulatory agencies: BRSA and SDIF.  The GOT pushed for 
the separation, most likely as a way of appointing an 
entirely new SDIF board, thereby strengthening its control 
over the SDIF's sensitive management of intervened banks and 
their assets.   The IMF went along with the separation of the 
two boards, on condition that the new board members be 
well-qualified.  On January 14, the GOT announced its 
candidates for the new SDIF board.  The GOT's candidate for 
chairman was  Abdullah Soysal.  Soysal, like 
recently-appointed BRSA Chairman Tevfik Bilgin, is a former 
on-site bank inspector (sworn auditor) who also has bank 
management experience.  A week later, however, the 
appointments of Soysal and one other board candidate were 
rejected by President Sezer.  Soysal had been a manager of 
Interbank, a bank that later failed and had to be taken over 
by SDIF.  The GOT subsequently proposed Ahmed Erturk, a 
member of the Capital Markets Board and former Al-Baraka Turk 
manager, to be chairman, and Erturk assumed the SDIF 
chairmanship on January 29. 
 
 
7. (C) Klingen said that not only the Chairmen but also the 
Vice Presidents, and possibly one layer below that, will be 
changed at the two regulatory bodies.  The new people seem to 
be less independent-minded and less qualified than their 
predecessors.  Klingen pointed out that there are many 
unresolved questions about how the newly-separate BRSA and 
SDIF will work with each other, particularly since in the 
past SDIF relied on BRSA in many areas.  Klingen raised the 
possibility of a separate asset management agency. 
 
 
8. (C) It is striking that five of the seven SDIF board 
candidates originally proposed by the GOT are former sworn 
auditors.  Recently-removed BRSA Vice President Fikret Sevinc 
told econoff that BRSA Chairman Bilgin was very close to the 
network of sworn auditors, who tended to keep their distance 
from other BRSA and SDIF officials, thereby exacerbating 
communication and coordination problems at BRSA.  Central 
Bank officials and the IMF Deputy Resrep have confirmed that 
the sworn auditors are a close-knit faction, and the IMF 
Deputy Resrep said the IMF has been trying to dilute the 
sworn auditors "monopoly" on bank inspection. 
 
 
9. (C) BRSA and SDIF are also reeling under multiple 
investigations looking for corruption: SDIF V.P. Berberoglu 
recently told econoff that forty-odd investigators--from 
parliament, the prime ministry and other investigative 
bodies--are swarming over SDIF and BRSA, questioning myriad 
prior decisions. 
 
 
Failure of SDIF Asset Tender: 
---------------------------- 
 
 
10. (C) Another IFI concern relates to the effective death of 
the SDIF asset sales program.  Sevinc characterized estimates 
of as much as USD 50 billion for the value of the SDIF's 
portfolio of seized assets as wildly inflated, the result of 
a provision in Turkey's bankruptcy law that uses 200 to 300 
percent interest rates to value assets.  Sevinc said this 
provision was left over from Turkey's hyperinflation days, 
when bankers wanted to avoid having the value of their assets 
inflated away during lengthy bankruptcy proceedings.  In 
reality, Sevinc estimated the value of SDIF's portfolio at 
about USD 3 billion, which helps explain the recent failure 
of SDIF's tender of non-performing loans (NPL's). 
 
 
11. (C) A U.S. Treasury Technical Advisor, who had been 
working with SDIF on the asset sales program, told econoff 
that the program had succeeded in attracting serious bidders: 
Deutsche Bank, Morgan Stanley, and Credit Suisse, among 
others, bid on the package with a book value of USD 320 
million.  The advisor felt that Price Waterhouse, retained by 
SDIF, had done a good job in valuing the NPL's at USD 30-80 
million.  However, SDIF's board--which knew it was about to 
be replaced--then set a "reserve price" of over USD 100 
million, below which they would not sell.  When the high bid 
came in at USD 53 million, the SDIF board cancelled the bid. 
The U.S. Treasury advisor believes that the bid--at almost 17 
percent of book value--approaches U.S. FDIC's historical 
results and should have been accepted.  His advisor 
colleagues and the IMF agree.  All agree that this result 
effectively ends the asset sales program for the time being, 
since no financial house  will take the time and expense of 
bidding in the future.  The failure of the SDIF tender, like 
that of some recent privatizations, points to the need for 
protection from prosecution for government officials for 
their official decisions.  Klingen said whenever the IMF 
raises this issue, the GOT says it is too difficult to take 
on. 
 
 
Failed Bank Owners' Try to Return to Sector 
-------------------------------------------- 
 
 
12. (C)  The IFI's and many analysts are also perturbed by 
two recent attempts by former owners of failed banks to 
regain control of their old banks.  Econoff asked SDIF V.P. 
Berberoglu about press reports that Cukurova Group was trying 
to: a) restructure its debts to SDIF, and b) take back 
control of Yapi Kredi Bank.  Note: At the same time, Cukurova 
was part of a consortium bidding on the privatization of the 
state oil refiner, Tupras, though this consortium has lost 
out to a competing bidder. End Note.  Berberoglu confirmed 
that Cukurova had indeed written to SDIF proposing to pay a 
smaller amount to SDIF on both Pamuk and Yapi Kredi, in 
return for a much shorter repayment period. As for rumors 
that Cukurova is trying to reassert control over Yapi Kredi 
Bank, Berberoglu agreed that this would appear to be a 
violation of the Banking Act's requirement that no executive 
of a previously-failed bank be allowed to have a banking 
license. 
 
 
13. (Sbu) On January 26, BRSA/SDIF Chairman Bilgin announced 
that SDIF had rejected Cukurova's offer as not in compliance 
with the law.  In his public statement, however, Bilgin left 
open the possibility that SDIF might entertain other 
proposals from Cukurova in the future, and there continue to 
be rumors in financial markets that Cukurova will make 
another attempt to get back into Yapi Kredi. 
 
 
14. (C) The other, more immediately troublesome case relates 
to the SDIF-ousted former owners of Demir and Kent Banks. 
Klingen lamented the legal can of worms opened by a court 
decision to overturn SDIF's earlier takeover of Demir and 
Kent.  One of the earlier IMF reforms was to have all bank 
regulatory cases heard by a single chamber of the Council of 
State (Danistay), so as to have all cases heard by a judge 
with banking expertise.  This chamber had upheld SDIF's 
takeover of Demir and Kent, but on appeal the decision was 
overturned by the General Assembly of the Danistay. Next 
steps on the Demir and Kent cases are unclear, according to 
Klingen, with even the legal experts of the BRSA/SDIF unsure 
what can be done.  If the cancellation of the takeover 
stands, it could imperil SDIF's subsequent sale of Demir to 
HSBC, one of the few large foreign investments in Turkey in 
recent years. 
 
 
State Banks Grow Larger Amid Delays on Privatization 
--------------------------------------------- ------- 
 
 
15. (C) World Bank Country Director Andrew Vorkink recently 
told Econcouns he sees little prospect that the State Banks 
will be privatized soon.  There have been several public 
hints in recent weeks that the GOT and state bank management 
are not expecting to privatize the state banks in the near 
future. According to Keskin of the Bankers' Association, 
Prime Minister Erdogan recently told a meeting of AK Party 
parliamentarians that, when the blanket deposit guarantee is 
phased out this summer, people with worries about private 
banks could shift deposits to state banks.  Keskin worried 
about phasing out the blanket guarantee while some banks 
remain under state ownership. Meanwhile, the Managing 
Director of state-owned Ziraat Bank has been talking about 
his strategy for the year, giving no indication that the bank 
might be privatized.  At the same time, Ziraat's deposit base 
has been enlarged by virtue of the transfer of failed Imar 
Bank's deposits to Ziraat, and Halk Bank may be enlarged by a 
possible merger with SDIF-intervened Pamuk Bank. 
 
 
Comment: 
------- 
 
 
16. (C) Since coming to power, GOT actions have suggested 
both a strong desire to gain control of the independent bank 
regulatory agencies and a reluctance to move ahead on state 
bank privatization.  As the banking sector faces a crucial 
transition year, the GOT does not seem to be sensitive to the 
risks to the sector stemming from the disarray at the 
regulatory agencies and the absence of progress on bank 
privatization. 
 
 
 
 
 
 
 
 
 
 
EDELMAN