US embassy cable - 04ANKARA2490

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