US embassy cable - 04ANKARA3429

UNCLAS SECTION 01 OF 02 ANKARA 003429 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EB/IFD, AND EUR/SE 
TREASURY FOR OASIA - RADKINS AND MMILLS 
NSC FOR BRYZA AND MCKIBBEN 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, PGOV, TU 
SUBJECT: MEETING WITH BANK REGULATORY BOARD CHAIRMAN 
 
REF: ANKARA 3412 
 
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. 
 
 
EDELMAN