The new Banking Law (5411, November 19 2005) abolishing and replacing previous Banking Laws came into force on November 1 2005.

The new Banking Law, for the first time, lists the activities that can be carried out by banks. These listed activities will be add to their legal capacities in terms of their activities as joint-stock companies.

Regarding the legal person capacity in the context of trade companies, the Turkish Commercial Code (TCC) stipulates: "Trade companies possess a legal personality and they can acquire all rights and can assume all obligations on condition that they do not infringe the subjects of activity written in their articles of association."

Being joint-stock companies, banks must also comply with the provision to make "a clear-cut definition of the boundaries of the subject of the company in the Articles of Association" as stipulated in the TCC. Accordingly, if a bank does not intend to carry out some of the activities referred in the Banking Law, a bank has to state this fact clearly in its articles of association, which can be deemed the constitution of the company – based on its obligation to state the subject of the company clearly.

Banking activities under the new Law

The Banking Law stipulates banking activities as:

• accepting deposits (for deposit banks);
• accepting participating funds (for participation banks);
• extending cash, non-cash, and other kinds and forms of credit;
• all payment and collection transactions, including cash and bank payment and fund transfer transactions;
• acting as a correspondent bank for use of cheque accounts;
• purchase of transactions of cheques and other foreign currency notes;
• custody services;
• issuing payment instruments such as credit cards, bank cards and travel cheques, and performance of activities relating to those instruments;
• foreign exchange transactions, including effective transactions, purchase and sale of money market instruments, purchase, sale and custody of precious metals and stones;
• purchase and sale of, and acting as intermediary in transactions of, future contracts, options contracts, and multiple-derivative financial instruments with simple or complex content; based on economical and financial indicators, capital market instruments, commodities, precious metals and foreign exchange;
• purchase and sale, and repurchase or resale commitments, of capital market instruments;
• intermediary transactions for the sale of capital market instruments through issues or public offerings;
• purchase and sale of issued capital market instruments for intermediary purposes;
• guarantees such as the assumption of collaterals, guarantees and other such liabilities in the names of others;
• investment consultancy services;
• portfolio operations;
• portfolio management;
• acting in the capacity of market-maker in purchase and sale transactions within the framework of obligations to be assumed under a contract established by the Undersecretariat of Treasury (UT) and/or Central Bank (TMB) and professional associations;
• factoring and forfeiting transactions;
• intermediation to the transactions of buying and selling money in interbank market;
• financial lease transactions;
• insurance agency and private pension intermediary services; and
• other activities to be determined by the Banking Regulation and Supervision Agency(BDDK).

Prohibited transactions

The Banking Act explicitly prohibits deposit banks from accepting participating funds and carrying out financial lease transactions. Participation banks are not allowed to collect deposits.

Development and investment banks, just like the deposit banks, are not allowed to accept participating funds or to carry out financial lease transactions.

Banks incorporating or opening branches in Turkey

The following transactions are subject to authorization from the BDDK:

• incorporation of banks in Turkey;
• the opening of a first branch in Turkey by a bank incorporated abroad (a foreign bank);
• incorporation of a bank in Turkey exclusively for carrying out offshore banking activities;
• the opening of an offshore banking branch in Turkey by foreign banks; and
• opening by foreign banks of a representative branch in Turkey on condition of not accepting deposits and participating funds.

A bank incorporated in Turkey must be a joint-stock company, its shares should be issued in cash and all of its shares should be registered (written to name). Founders of the bank should possess the required legal qualifications and the members of its board of directors should have the required professional experience.

Its cash paid-up capital should be at least TRY30 million (reduced to two-thirds of this figure for development and investment banks).

A bank's activity should be in harmony with its planned financial, administrational and organizational structure. Its articles of association should be in compliance with the Banking Law, and its shareholder structure and organizational chart should be transparent and open to facilitate audit. There should be no impediment for a consolidated audit.

Documents such as the business plan activity programme showing the budget plan and structural organization of the projected organization for the initial three years, including financial structure and the related projections, and its capital adequacy for the projected activity subjects, should be submitted to the public authorities. (The activity programme should also include internal control, risk management and internal audit systems).

Qualifications sought in the founders

Article 8 of the Banking Law has identified the qualifications required of a bank's founders. Qualifications of real persons include the concepts of having the required financial strength and reputation, and having the honesty and compatibility required by the job. Qualifications sought from legal persons include, among others, the condition to have a transparent and open shareholder structure, together with the risk group.

Opening foreign branches in Turkey

Opening domestic branches in Turkey is unrestricted, provided the BDDK is notified. For a foreign bank to open a branch in Turkey the following conditions must be met:

• It should not be banned from its principal activities in its country of origin.
• The authorized supervision authority in the country of origin does not oppose the bank carrying out activities in Turkey.
• Its paid-up capital should be similar to that of Turkish banks.
• Members of the committee of managers of the foreign bank branches should have the professional experience required by the Banking Law (professional experience means the conditions stated in the institutional management principles and the experience required to carry out the intended activities).
• Business plans for the authorized activities, and the budget plan and activity programme showing the structural organization of the foreign bank should be submitted to the authorities.
• The group the bank is a member of should be transparent and open.

Certificate of activity

The Banking Law still requires banks to obtain authorization from the Agency to incorporate or open branches in Turkey before starting their operations. These authorizations become effective upon publication in the Turkish Official Gazette.

Certain conditions must be fulfilled before a bank is granted authorization:

• The capital should be paid in cash.
• At least one-quarter of the 10% minimum capital (system entry share) provided by the Banking Law should be deposited to the fund.
• Institutional management principles must be conformed to, and adequate qualified personnel and technical hardware criteria should be attained.
• The BDDK must state that the bank is qualified to carry out its activity subjects.

Banks opening branches, including offshore banking branches, establishing representatives and founding and participating in partnerships are subject to the consent of the BDDK.

A bank's certificate of activity will be void if it was granted based on untrue statements, if

operations fail to start within six months of receiving the certificate, or if the bank is inactive for six months uninterruptedly in a year.

Merger, division and exchange of shares

The BDDK's consent is required for any bank active in Turkey to:

• merge with any other banks or finance institutions;
• take over the assets and liabilities of any other bank together with all rights and obligations;
• undertake a division; and
• exchange shares.

The Banking Law rules that, as long as the share of the total assets of the participating banks does not exceed 20% of the banking sector, the provisions of the Law on the Protection of Competition regarding the obligation to notify mergers and takeovers to the Competition Board does not apply.

Mergers, divisions and transfers in accordance with the provisions of the Banking Law, and transfers and mergers in accordance with the TCC also require BDDK consent.

Corporate governance

The Banking Law stipulates that the BDDK should determine a complete set of corporate governance rules based on similar rules introduced globally, especially in economically developed countries, to protect the rights of various stakeholders, managers, and creditors of organizations such as publicly held companies and banks that have a decisive role in the management of the funds of third parties.

The Banking Law provides that this determination process should also take into consideration the opinions of the Banks Association of Turkey (TBB), the Association of Turkish Participation Banks and the Capital Markets Board. The fact that these principles, thus determined, should be complied by all banks can be deduced from references in many articles of the Banking Law.

Also, provisions introduced regarding audit committees indicate that there will be continuous supervision and control over banks' legal and banking activities.

Internal systems

The Banking Law requires banks to establish and operate an adequate and efficient system for internal control, risk management, and internal audit that is consistent with the content and the nature of the activities of monitoring risks and maintaining control over these risks, conforming to the changing conditions, and which "covers all branches and the companies subject to consolidation".

Basel standards

The principles and procedures regarding this subject will be determined by the BDDK.

In banking business, continuously keeping the possible risks under control is crucial. Which is why international banks jointly established the Basel Committee in 1974 under the roof of the Bank for International Settlements(BIS), which acts as the central bank of the central banks, to ensure the operation of all banks under common standards. This is the approach underlying the supervision systems for capital adequacy and risk. The Basel Committee in 1988 reviewed operational criteria, risk tolerances, and capital adequacies of banks and came to the conclusion that the ratio of a bank's capital to its risks should be at least 8%. The standards introduced by these meetings are known as Basel-I.

Upon increased complication and tumult in the markets, it was decided that new criteria should be introduced regarding risk; and subsequently determined standards were named Basel-II. Its basic principles of efficient regulation and supervision in banking are that:

• risk management is as important as risk measurement when calculating capital adequacy; and
• the concept of operational risk requires fulfilment of capital adequacy requirements as well as protection against credit risks.

The risk covers the risk of the company using the credit, as well as the risk of the credit transaction. The former is a standard procedure for bankers, along with the rules that apply to assessing a company. Calculation of the true size of the credit risk by assessing the type, guarantees, and maturity of the credit transaction as well as the currency-related country risks requires vigilance.

Assessment of a company is expressed in the form of a rating, and the bank may feel itself secure and comfortable to the degree of its rating. The lower rating requires the bank to set aside more provisions and more capital. It is clear that this requirement means more expensive credit.

Crisis-averting principles required to be introduced by institutions that regulate and supervise the banking industry – the BDDK is one of them – to guarantee safe operation of banks are considered a public service under the BASEL Basic Principles, as well as under the laws of Turkey.

This public service should be viewed as instrumental in reducing the costs to the country of internally and externally originated economic crisis, and the measures taken should be implemented seriously. While a general monitoring of conformance to the laws and regulations by the regulatory authorities is an appropriate and required procedure in the institution and implementation of the public regulations, this is not enough; immediate intervention as required should not be evaded, and should be done in a timely manner.

The BDDK has crucial responsibilities in the creation of a healthy market in Turkey, along the guidelines of Basel Banking Committee. Its burden is rendered still heavier as banks' smooth operation in a comfortable environment is getting harder due to the pressing conditions created by economic forces acting freely under the cover of an internationally recognized globalization concept, the requirements posed by the EU harmonization process, and the debt stocks inherited from the previous government. Turkey's borrowing in domestic and international markets is a success, however, it is known that equities of Turkish banks are not adequate. It is well known that equities of Turkish banks are not adequate.

Turkish banks intend to cover this shortage through foreign capital under the supervision of the BDDK. On the other hand, markets have been flooded with hot money. The Turkish banking environment is expected to stabilize as the efficiency of the money policies carried out firmly by the Central Bank under its IMF-monitored stability programme yield the results of decreased country risks and other risks.

Banking regulatory and supervisory authority

A Bank Recapitalization Law has been passed as a result of pressure from the IMF.

This law (4743 of January 30 2002), authorizes the Turkish Banking Sector Regulatory Body (BDDK) to recapitalize certain banks.

The BDDK is an administratively and financially autonomous entity. The decision-making body of the Agency is the Banking Regulation and Supervision Board, which consists of seven members and is appointed by the Council of Ministers, upon the proposal of the responsible minister. The BDDK is financed by the banks' contributions, calculated on the basis of their balance sheets.

Forty-eight banks in total operate in Turkey: 18 private, two state, 13 foreign and the Saving Deposit Insurance Fund (TMSF) bank operate as commercial banks. The banking sector is largely open to foreign operators; however their share in total assets was limited to 3% as of 2004. Turkish state banks control 35% of total assets, provide 21% of the total loans, and collect 42% of the total deposits.

The recapitalization programme being implemented should lead to extensive restructuring of the Turkish banking sector.

The BDDK adopted a detailed road map for the Basel-II capital requirements framework, with a view to start implementation as of January 2008 with the less advanced approaches and as of January 2009 with the more advanced ones.

The BBDK concluded memoranda of understanding with the banking supervisory authorities of Albania, Bahrain, Indonesia, Kazakhstan, Pakistan, Romania, Malta, Greece and Kyrgyzstan.

The Capital Market Board (SPK)

The SPK acts as the regulatory and supervisory body for the financial investment services and securities markets. The SPK is a public entity with administrative and financial autonomy.

A total of 16 memoranda of understanding have been concluded with foreign supervisory authorities to exchange of information and improve supervisory cooperation.

Author biographies

Hakan Hanli Pekin & Pekin Hakan Hanli, born Ankara, Turkey: March 6, 1967. Work experience: Akin Gump Strauss Hauer & Feld LLP, Brussels, associate (1994 to1996); Smit & Partners, Brussels, Senior-Associate (1996 to 2001); Stanbrook & Hooper, Brussels, partner (2001 to 2003); Philippe & Partners, Brussels, partner (2003 to 2004); Pekin & Pekin, Istanbul, partner (2004 on). European Commission, Directorate General of Telecommunication, Information Industries & Innovation, legal expert (1992 to1993); numerous published legal research articles on international, European and Turkish laws; international and European affairs legal adviser for: YES For EUROPE/TUGIAD, FEB-FCCIB/TBTD, CCBE/TBB; nominated as arbitrator at Belgian Commercial Arbitration Court by the National Committee of the ICC (2005). Member: Ankara (transferring to Istanbul 2006) Bar Association (admitted 1990); Brussels Bar Association (admitted 1994). International Bar Association, American Bar Association; and European (CCBE) Bar Councils. Practice areas: International and European law, capital markets, corporate and commercial law, competition law; telecommunications law, ICT, M&A, energy law, intellectual property law, civil aviation law, sports law. Awards: First prize as Outstanding Young Person in Legal, Political & Public Affairs awarded by the JCI-Junior Chamber International (1999). Education: University of Ankara Law School (LLB 1989); University of Catholic Leuven Law School (LLM 1993); University of Free Brussels Law School (LLE 1994). Languages: Turkish, English, French and Dutch. Vural Günal Pekin & Pekin Vural Günal is a senior partner and his practice areas include capital markets, banks and banking. His work experience includes the Central Bank of the Republic of Türkiye, legal department 1962-1970; chief legal adviser 1970-79; vice-president 1979-1981; member of capital markets board 1982-94. Lecturer on tax law, foreign currency law, capital markets law at Health Administration College, Gazi University Banking Institute 1965-96. Author on subjects as above and Central Bank, Private Financial Institutions and over 200 editorials on economy and law. Member of the Ankara Bar Association 1962-79; IOSCO General Assembly member 1982-93. Vural Günal was born in Ankara in 1936 and was educated at the University of Ankara Law Faculty (1959 LLB); he speaks Turkish and French.