In the IMF letter of intent dated April 26 2005, the Turkish
government undertook to introduce a new banking law that would
improve the sector's supervisory and regulatory framework.
Parliament first approved the new banks act on July 2 2005.
Although president Sezer previously exercised his veto right
against three provisions of the new act, the parliament passed
it on October 20 2005 without any amendments.
The Banks Act No. 5411 introduces many new concepts to the
Turkish banking system. Nevertheless, many of these concepts
were discussed during the drafting of the law, including in the
working papers of the Banking Regulation and Supervision Agency
(BRSA) in previous years, and were therefore expected by the
market. The new concepts follow.
Financial holding companies
Law No. 5411 points out that the distinctions between many
financial services have faded and it has become common practice
to offer financial services as a whole package. It further
emphasizes that corporate structures like financial holding
companies, which provide a full range of different financial
services such as banking, insurance and securities trading,
have gained importance in the world economy. Law No. 5411
defines financial holding companies as "holding companies
holding interest in financial institutions, at least one of
which is a bank or a special finance institution". It states
that the BRSA will be authorized to determine the scope of a
financial holding company's activities and to dictate a group
to be structured as a financial holding company. With the
recent amendments, financial holding companies will be subject
to Law No. 5411 and to the BRSA's regulations regarding capital
adequacy, risk management, internal audit and monitoring
mechanisms, and intra-group transactions.
BRSA's regulatory scope
Law No. 5411 states that the liberalization and integration
of financial markets forced the regulatory authorities to
reconsider their status. It states that the financial crises in
Norway, Finland and Sweden in the early 1990s raised the
question as to whether only one financial regulatory authority,
which monitors and supervises all financial institutions, is
appropriate. Placing emphasis on the nature of financial
services provided by various financial institutions and their
shareholding structures, the law states that the recent trend
is to have one regulatory authority. Following this approach,
according to Law No. 5411, the authority to monitor and
supervise certain institutions will be transferred to the BRSA.
The institutions concerned are: non-bank financial institutions
(financial leasing companies, factoring companies and consumer
financing companies), which were previously regulated and
monitored by the Undersecretariat of Treasury; other
institutions in the financial sector to be determined by the
BRSA; and companies providing support services to these
In one of its recent public announcements the BRSA stated
that to ensure continuance of confidence and stability in the
financial markets as well as cooperation and coordination among
authorities, to make common policy suggestions, and to render
opinions on issues that will affect the future of the finance
sector, a commission called the Financial Sector Commission
will be established by the BRSA. Representatives from the
following institutions will participate: the Ministry of
Finance, the undersecreteriat of the treasury, the Central
Bank, the Capital Market Board, the Savings Deposit Insurance
Fund, the Competition Board, the State Planning Organization,
the Istanbul Gold Exchange, the Futures and Options Exchange,
stock exchanges and other relevant business associations.
The law also states that the Financial Sector Commission
will convene at least once every six months and inform the
Council of Ministers on the outcome of the meeting. The BRSA
will be responsible for determining the working procedures and
principles of the Financial Sector Commission after obtaining
the views of the relevant member authorities.
In the IMF standby letter, the Turkish government undertakes
to strengthen the BRSA's supervision. It also states that the
BRSA will publish a list of actions it will take to strengthen
its organizational structure, coordinate on-site and off-site
supervision, and enhance the effectiveness of its staff. It
will publish a timetable for the implementation of these
In a recent public announcement the BRSA stated that Law No.
5411 aims to amend the current legal system to meet the
requirements of the dynamic nature of the sector, and to
establish a regulatory and supervisory structure that complies
with EU norms and international standards. In its announcement,
the BRSA also stated that it will launch a risk-focused
supervision project. Within two months following the enactment
of the new law, a new regulation will be introduced on the
BRSA's establishment and working principles to ensure more
effective, flexible and proactive supervision.
The new law contains detailed provisions enabling the BRSA
to conduct on-site inspections allowing it to use independent
experts in the process.
Cooperation between the BRSA and the SDIF
Prior to December 26 2003, the board of the BRSA represented
and managed the Savings Deposit Insurance Fund (SDIF), which
made the SDIF a legal entity under the BRSA's control. With the
new amendments, the SDIF has become a completely autonomous
agency managed and represented by its own board. The
authorities of the board of the BRSA relating to the SDIF were
transferred to the SDIF's own board.
Law No. 5411 introduces a new commission called the
Coordination Commission, whose members will comprise of
representatives from the SDIF and the BRSA. The commission will
share information relating to the general status of the banking
system between these two regulatory authorities, as well as
measures that need to be taken as a result of the inspections
and certain financial information from the banks.
Law No. 5411 has no provisions relating to technical issues
regulated under the Basel II accord. The law explicitly
indicates that the secondary regulation to be issued by the
BRSA will regulate in detail the adoption of the Basel II
accord and the transition period.
Law No. 5411 states that recent bank failures are due to a
lack of application of corporate governance principles. It also
notes that unlimited management rights of controlling
shareholders caused banks' resources to be used in an
inefficient manner and in wrong investments, which lead to the
misuse of deposit holders' funds and damages to minority
shareholders. Therefore it is important to establish and
develop a strong corporate governance structure, process and
principles to avoid similar crises and to regain public
confidence in the system.
Law No. 5411 has a separate section regarding corporate
governance. Although the scope and limit of corporate
governance principles yet to be determined, the law states that
the BRSA will consult with the Capital Markets Board and
relevant institutions to determine corporate governance
structure, process and principles. One may understand the
priority the BRSA gives to corporate governance by reading
various provisions of Law No. 5411, which stipulate compliance
with corporate governance principles to grant certain
permissions and to determine compliance with requirements of
The BRSA is authorized to determine different minimum ratios
of capital adequacy for a bank or group by taking into
consideration the bank's compliance with corporate governance
principles. The BRSA will also consider banks' compliance with
corporate governance principles when it decides whether to give
permission to open branches or do cross-border activities.
Law No. 5411 also imposes certain new and important
obligations on banks. These include: a requirement for banks to
realize their capital increases through cash commitments and
not through revaluation funds (except for permitted funds); an
obligation to disclose their articles of associations and
annual activity reports on their websites; and a duty not to
make donations over the threshold stated in the law.
Law No. 5411 is a detailed piece of legislation, aiming to
provide an improved regulatory framework in compliance with EU
directives and international standards.