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Western EuropeNovember 1 2011

Turkey fixes a regulator that isn’t broken

Turkish financial regulators are widely credited with steering the sector successfully through the global financial crisis. So why is the government abolishing their independence?
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What's the background?

The Turkish banking regulator (BRSA), deposit insurance fund (SDIF) and capital markets board (CMB) were given full operational independence in 2003 as part of an International Monetary Fund (IMF) emergency package for Turkey. This followed a financial crisis in 2000 to 2001 which had resulted in 21 banks going into administration.

“We wanted to be in charge of our own recruitment and training, and to have our own budget funded by the market players, not from the general budget,” says Engin Akcakoca, a banking consultant who was head of the BRSA from 2001 to 2003.

So what's happened?

Clause 45 of the Turkish government’s August 2011 decree (KHK) on 'The Organization and Functions of the Ministry of the EU' states that “the minister is entitled to supervise the operations and transactions of related and relevant agencies”. The list of nine agencies affected includes the BRSA, SDIF and CMB. Their funding will revert to the general budget, rather than deriving from the institutions that they regulate.

Why is it happening?

Good question. There were no bail-outs in Turkey after the 2008 global financial crisis, and return on equity among the top 10 Turkish banks has averaged well above 20% for the past couple of years. “Bank regulation and supervision in Turkey has been perfect lately. The BRSA was strict in the good times around 2006, the regulators told the banks that we cannot squeeze you in the bad times, so we must do it now,” says one senior bank executive.

Clear public explanations of the KHK’s purpose have been lacking. Mr Akcakoca says this is the opposite of good supervisory practice, which requires proper communication with the market.

The best guess of Onur Taktak, a lawyer at Kinstellar in Istanbul and a former in-house counsel at Yapi Kredi Bank, is that politicians wanted the power to instruct supervisory agencies to act in line with government macro policies. “There seem to have been complaints in the government that it was difficult getting everyone to go in the same direction,” he says.

There was a flashpoint in early 2011, when the Turkish government proposed a 25% cap on 2011 lending growth, to curb the country’s high current account deficit. Deputy prime minister Ali Babacan spoke of unspecified sanctions against banks that did not comply. While BRSA head Tevfik Bilgin verbally supported the 25% target, he did not introduce any specific measures to enforce it.

What does the industry think?

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So far, bankers have refrained from commenting publicly on the change of status for the regulators. The decree could allow ministerial power over appointments, so Mr Taktak says that any management transition at the three agencies would be especially sensitive.

“The banks want to see how the new system is implemented in practice as a first step. And they trust themselves, because the BRSA has taught the banks well, they are now in a strong position,” says Mr Taktak.

But there have been rumblings of discontent since the 25% loan growth cap proposal. Year-on-year loan growth at Turkey's largest state-owned banks such as Ziraat and Vakif in the first half of 2011 was far above the 25% target, and higher than at the private banks. This created the impression that the government is seeking a larger role in the banking sector generally.

And banking in Turkey is inherently political. Wealthy families who have long been political power-brokers own stakes in some of the leading Turkish banks, and Isbank, the county’s largest, is 28% owned by the country's main opposition party, the CHP.

Could we live without it?

Definitely. Few regulators have come through the financial crisis with their credibility as strongly intact as those in Turkey, but the KHK has introduced a note of uncertainty.

“One of the reasons for the 2001 Turkish crisis was the influence of government on the banks, and the autonomy of regulators was a strong medicine to heal this. It gave a very strong message to investors around the world that Turkey had changed, but now we may lose that message,” says Mr Taktak.

Mr Akcakoca says relations between the BRSA and the current single-party government appear much better than his own relationship with the fractious coalition government of a decade ago. But such coordination cannot be guaranteed.

“Good bank supervisors always want credit growth at manageable levels, whereas for politicians credit growth is usually desirable. There will be times when the objectives of the supervisors and the government do not match,” he says.

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Read more about:  Reg rage , Regulations , Western Europe , Turkey