Mehmet Ali Akben

Turkey’s banks are coping well with the financial, digital, economic and geopolitical risks confronting them, according to Mehmet Ali Akben, chairman of the country’s Banking Regulation and Supervision Agency. Michael Imeson reports.

Considering the various headwinds facing the Turkish banking sector, and its economy in general, the country’s most senior banking regulator is sanguine about the situation due to Turkey’s lenders being adequately capitalised, highly liquid and profitable.

“Capital ratios and quality are quite strong in the Turkish banking system,” says Mehmet Ali Akben, chairman of the Banking Regulation and Supervision Agency (BRSA) in Turkey. “Almost 80% of total capital is composed of common equity Tier 1 capital. In addition, the banking sector is operating with a 6.6% leverage ratio — higher than the Basel III 3% minimum.”

As for liquidity, more than 50% of banking assets are funded by deposits. Liquidity ratios are well above the legal limits, and strong enough to ensure financial stability and withstand any liquidity shocks. Bank profits have also been increasing, fuelling capital strength. 

“During the past two years, the Turkish banking system has proved its resilience in terms of capital and liquidity against the shocks encountered,” says Mr Akben, who became BRSA chairman in 2015 before being appointed for a second term in 2019. “Turkish banks have been able to roll over their syndicated loans in that time without any significant cost pressure.”

Threats to financial stability

The BRSA is closely monitoring the potential threats of declining asset quality, dollarisation and the Russia–Ukraine war. Still, the non-performing loan ratio had declined to 3% by February and is not expected to significantly increase for the rest of the year. Although a worsening of the macroeconomic situation could negatively affect asset quality, Mr Akben says that any issues will be “at manageable levels” thanks to banks’ strong capital, provision levels, profitability and balance sheet composition.

During the past two years, the Turkish banking system has proved its resilience in terms of capital and liquidity against the shocks encountered

Mehmet Ali Akben

As for dollarisation — the tendency for people and businesses to use US dollars instead of the vulnerable Turkish lira — around 70% of bank deposits were in dollars late last year. However, due to government intervention in December, that has now fallen to around 59%.

The BRSA is keeping a watchful eye on the conflict on the other side of the Black Sea. “The direct exposure of the Turkish banking sector to companies and individuals residing in Russia and Ukraine is at negligible levels, but is being closely monitored, as are the sanction lists,” says Mr Akben.

A risk-based approach to regulation

The BRSA takes a risk-focused supervision approach, which means that the scope, frequency, timing and intensity of supervision and allocation of supervisory resources are determined by taking into account a bank’s risk profile, as well as the quality of its internal control and risk management systems.

“State-owned banks are subject to the same regulatory and supervisory framework as private banks,” says Mr Akben. “The frequency and scope of on-site examinations are determined according to the relevant supervisory manuals, and they do not differentiate [between] state-owned or private [banks].”

The Covid-19 pandemic forced the agency to take several temporary measures to limit the impact on banks and their customers. Most were in line with those taken by EU regulators, but some were specific to Turkey. Most of these regulatory flexibilities have since been reversed as the Covid-19 impacts fade away.

Digitalisation and green finance

“Two major structural shifts are reshaping our banking sector: digital transformation and green finance,” says Mr Akben. The pandemic has accelerated banks’ digitalisation strategies. “As policy-makers, our main responsibility is to ensure a level playing field on that issue,” he adds.

For example, in 2021, the agency introduced a regulation on remote identification methods to be used by banks. “We see this as a major step towards creating an environment where clients can benefit from banking services without physically going to a bank branch, and instead can complete their banking transactions remotely.”

Another important regulation last year was on the operating principles to be followed by digital-only banks. It set out the limits on their activities; they are not, for example, allowed to open physical branches. It also established mandatory service continuity levels and other licensing requirements. “The regulation aims to promote financial innovation, facilitate access to banking services and increase financial inclusion,” says Mr Akben.

As for green banking, the BRSA published a document on that late last year entitled 'Sustainable banking strategy'. “In addition, the agency has plans to develop green finance activities in line with international regulations,” he says. Guidance will be published shortly, covering, among other things, climate risk management, reporting, data infrastructure and corporate governance.

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