The new banks act

Author: | Published: 1 Dec 2005
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Hergüner Bilgen Özeke

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Suleyman Seba Cad. Siraevler 55, Akaretler 34357 Besiktas-Istanbul Turkey

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+90 212 310 18 00

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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 institutions.

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.

Effective supervision

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 actions.

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.

Basel II

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.

Corporate governance

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 law.

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.