US embassy cable - 04ANKARA808

UNCLAS SECTION 01 OF 02 ANKARA 000808 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR EUR/SE, AND EB/IFD 
TREASURY FOR OASIA - JLEICHTER AND MMILLS 
NSC FOR BRYZA AND MCKIBBEN 
 
 
E.O. 12958: N/A 
TAGS: EFIN, PGOV, TU 
SUBJECT: MEETING WITH BANK REGULATORY BOARD CHAIRMAN 
 
 
REF: ANKARA 763 
 
 
1. (Sbu) Summary. In his first meeting with Econcouns, Bank 
Regulatory Board Chairman Tevfik Bilgin claimed he was fully 
independent and laid out his vision of a strong bank 
regulator, working closely with the newly-separate deposit 
guarantee agency.  Bilgin commented on lessons learned from 
the Imar Bank scandal and vowed to take a restrictive line on 
bank ownership criteria, though he was not optimistic the 
courts would reverse their recent overturning of SDIF 
interventions in Demir Bank and Kent Bank.  End Summary. 
 
 
Separation of BRSA and SDIF: 
--------------------------- 
 
 
2. (Sbu) On February 9, Econcouns and Econoffs met with 
Tevfik Bilgin, who has had something of an action-packed 
honeymoon period since being appointed Chairman of the Bank 
Regulatory and Supervisory Agency (BRSA) in November.  Until 
15 days ago, Bilgin was also the Chairman of the board of 
SDIF (Savings Deposit Insurance Fund), but now the two boards 
are separate (reftel).  Bilgin praised the separation, and 
said the new SDIF board, which will sit in Istanbul rather 
than Ankara, will benefit both from the proximity to the 
Istanbul financial center and from the distance from 
politicians in Ankara.  As for BRSA, Bilgin welcomed his 
being able to concentrate on BRSA's core functions, noting 
that he had been obliged to spend seventy percent of his time 
on SDIF issues.  He recognized, however, that SDIF and BRSA 
will need to cooperate closely. To this end, he and the SDIF 
chairman plan to meet every week, and senior BRSA staff are 
currently on loan to SDIF. 
 
 
Banking Law Revisions and Bank Ownership Criteria: 
--------------------------------------------- ---- 
 
 
3. (Sbu) Bilgin said his top priority in the coming months 
will be to update and revise Turkey's banking law.  Ideally, 
in Bilgin's view there should be two laws: one for BRSA and 
one for SDIF.  Among other improvements, the law needs to be 
harmonized with EU requirements and with Basel rules.  Though 
Bilgin claimed the existing law has strict rules about  bank 
ownership, there is room to tighten these requirements, since 
"the best way to steal from a bank is to own a bank." 
Bilgin's personal opinion is that owners of media outlets 
should not be able to own banks.  Some draft revisions have 
been passed to the Bankers' Association for comments and 
after the Association and the IFI's provide comments, the 
BRSA will ask the GOT to submit the law to parliament, 
probably sometime in the spring. 
 
 
4. (Sbu) Bilgin pointed out that Cukurova Group's recent 
attempt to get back into the sector was an issue for BRSA as 
well as SDIF, since it would involve the grant of a banking 
license.  Bilgin said that Cukurova's proposal called for 
Cayman Islands-based North Way Petroleum to be the owner of 
Yapi Kredi Bank, and the BRSA would need to have far more 
information about this group before it would consider 
awarding a banking license. 
 
 
Independence: 
------------ 
 
 
5. (Sbu) In reply to a question from Econcouns, Bilgin 
claimed he was fully independent, citing his ruling on the 
Cukurova issue.  Bilgin claimed that no one in the government 
had called him about the Cukurova case.  He also said that he 
challenged anyone to find a political appointment or a 
political credit during his time as manager of state-owned 
Halk Bank.  Of course, he had to go to Deputy Prime Minister 
Sener on issues affecting the Government, such as the 
phaseout of the deposit guarantee, but otherwise he was 
independent. 
 
 
Imar Lessons and Bilgin's Vision: 
-------------------------------- 
 
 
6. (Sbu) Bilgin laid out a vision of a strong BRSA, whose 
presence should be felt in the Banking Sector, "like Big 
Brother."  As a former sworn auditor (on-site bank 
inspector), Bilgin intended to meet frequently with the sworn 
auditors, as well as with bankers, to be sure BRSA's presence 
is felt.  Some of the lessons learned from the Imar Bank 
scandal are to conduct Information Technology audits and to 
pay greater attention to bank branches.  He also said 
inspectors need to exert their powers during audits, going to 
different bank departments without notice and demanding 
information, rather than passively remaining in a separate 
room and requesting documents.  Bilgin confided that some 
inspectors had called for regulatory intervention in Imar 
Bank as far back as 1986.  Currently, there are ten sworn 
auditors at Imar Bank plus many investigators from the 
Turkish police, but they are unable to piece together BRSA's 
pre-2003 accounts.  Bilgin does not believe there are other 
Imar-like banks in the sector, however.  Noting that BRSA has 
340 employees, 80 percent of whom have advanced degrees, he 
said he is hiring 30 new staff, of which 15 would be sworn 
auditors. 
 
 
Demir and Kent Bank Court Cases: 
------------------------------- 
 
 
7. (Sbu) Bilgin said the tenth chamber of the Danistay 
(Council of State) which specializes in BRSA/SDIF cases, has 
always ruled in favor of the regulators.  The problem with 
the Demir Bank and Kent Bank cases was with the appeal to the 
Danistay's General Assembly, which ruled in favor of the 
former owners.  Bilgin said the court ruled that the Demir 
and Kent cases were fundamentally different from other bank 
interventions, and that the Treasury should have helped Demir 
and Kent the way it helped other banks.  The BRSA is asking 
the court to review its decision but Bilgin is not 
optimistic.  Noting that Demir is now owned by HSBC, Bilgin 
surmised that the former Demir owner would come to BRSA and 
SDIF and ask for another bank, or a new banking license. 
 
 
Bank profitability, open positions, deposit guarantee 
phaseout: 
--------------------------------------------- ----------------- 
 
 
8. (Sbu) Bilgin agreed that 2004 will be less profitable for 
Turkish banks than 2003, with falling interest rates driving 
down profits on banks' government securities portfolios.  In 
this environment, Bilgin said there was intensifying 
competition among banks on credit business, particularly with 
small- and medium-sized enterprises (SME's).  Banks will have 
to develop their SME lending businesses, given that large 
corporations are able to borrow offshore. 
 
 
9. (Sbu) BRSA is closely monitoring banks' exposure to 
foreign exchange risks, using the reporting requirements 
imposed after the 1994 and 2000 crises.  Some banks are able 
to hide their positions offshore, and BRSA is required to ask 
fellow regulators in other countries to share information. 
Bilgin said this is a problem with some countries, mentioning 
Russia, Switzerland, and "some island countries." 
 
 
10. (Sbu) Bilgin does not anticipate deposits flowing to 
state-owned banks when the deposit guarantee is phased out. 
He pointed out that the guarantee will remain in place for 
deposits up to TL 50 billion (about USD 35,000) which will 
cover 95 percent of deposits.  On the other hand, the new 
regulations will mean that only deposits are covered, 
excluding other kinds of bank liabilities such as interbank 
loans.  This will lead non-deposit bank creditors to be more 
vigilant about bank creditworthiness and may lead to higher 
interest rates being charged to some banks. 
 
 
State-owned banks: 
----------------- 
 
 
11. (Sbu) Since Bilgin was recently the CEO of state-owned 
Halk Bank, econoffs inquired as to the status of the GOT's 
bank privatization plans.  Bilgin only offered his analysis 
that with the right preparation, Halk could be privatized. By 
the right preparation, he meant reducing the staff from eight 
thousand to four or five thousand, and reducing the branch 
network from 540 to 300 branches.  Bilgin claimed that Halk 
had a strong niche as lender to SME's, especially in 
Anatolia.  The privatization of Ziraat Bank, on the other 
hand, would be a different story, since Ziraat is a huge 
operation.  Separately, Bilgin said the regulators' decision 
to merge Pamuk Bank into Halk Bank was not final, and could 
be revised. 
EDELMAN