Turkey

Author: | Published: 9 Jul 2001
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Turkey has experienced two recent financial crises, in November 2000 and February 2001. In order to eliminate the volatility that has increased as a result, the Turkish government has felt the necessity to take new and radical measures and has adopted a strengthened economic programme "Transition to a Strong Economy" (the "Economic Programme"). This Programme aims to achieve financial stabilization, disinflation and enhanced governance and transparency. Since the main reason behind the two crises was mismanagement of the banks, a significant pillar of the Economic Programme entails a renewed attempt to eliminate the vulnerability of the Turkish banking sector by restructuring. The restructuring has been effected by Law No. 4672 Amending the Banks Act No. 4389 (the "Law No. 4672") which has been subject to certain prior amendments with the Law No. 4491 (collectively the "Banks Act"). This article examines the important aspects of the restructuring introduced by Law No. 4672.

Primary goals of the restructuring

The primary goals of the recent restructuring in the banking sector which are already adopted and announced by the Banking Regulation and Supervision Agency (the "Agency") are:

  • accelerating the liquidation process of the banks which are under the administration of the Savings Deposit Insurance Fund (the "Fund");
  • a complete financial and operational restructuring and rehabilitation of state-owned banks and banks in financial difficulty;
  • strengthening the private banking system; and
  • strengthening the legal and regulatory environment.

Structure of amendments introduced by Law No. 4672: an overview

The Law was among fifteen priority legislations that constitute the cornerstone of measures to support the Economic Programme.

Law No. 4672 is primarily designed to promote a sound, efficient and competitive banking sector and to provide for full integration of the Turkish banking sector with the international financial markets and aims to avoid mismanagement of funds and to strengthen Turkey's banking sector. The amendments to the Banks Act No. 4389, in summary, are:

  • "Net worth" and "consolidated net worth" are defined to allow the application of new connected lending limits on a consolidated basis and to make the legislation fully consistent with the EU standards. The Banks Act No. 4389 introduced the Banking Regulation and Supervision Board (the Board). The Board is the decision-making body of the Agency and is delegated as an administratively and financially independent regulatory authority and empowered with broad authority to prevent the implementation of any procedure that may hinder the proper functioning of banks. The Board is entitled to re-define the concept of "net worth" in parallel to the relevant EU directives and designate the form and principles of the concept of "consolidated net worth" which will be taken into consideration in the computation of the credit limits to be applied on the basis of consolidation and standard ratios.
  • General credit limits are broadened to be effectively monitored and other appropriate steps are taken to control or mitigate the risks. The definition of credit exposure is broadened to include banks' forward transactions, future and option contracts and other similar derivative type transactions in accordance with the EU directives, international principles and standards. This enlargement was introduced for confining the overall exposure to individual and related counter parties. The ratios, principles and procedures thereof to be taken into account in the calculation of the credit limits are determined by the Board and such credit limits are calculated and applied on a consolidated basis according to the procedures and principles to be laid out by the Board.
  • Clarification on the deductibility of loan loss reserves in calculation of corporate income tax base. Special reserves of the banks set aside for losses which have resulted or are expected to result from frozen credits and other receivables are treated as expenditures in the calculation of corporate income tax base in the year in which they are set aside.
  • Restrictions on equity participations in non-financial institutions. General limit on banks' participations to non-financial institutions is changed in parallel to the EU directives. To this end, banks may acquire shares of a company other than a financial institution, up to 15% of their net worth, and the total sum of investments in these companies may not exceed 60% of the bank's net worth.

Banks and special finance institutions have to comply with the above requirements and to decrease the amount of their participations in certain periods and rates both of which are to be determined by the Board within a transition period lasting until December 31, 2009.

  • Broad privileges granted to the Fund with the aim of ensuring efficient and speedy collection. The Fund, which is administrated and represented by the Agency, is bestowed with great powers under the Law No. 4672. It is awarded with a preferential right to collect the receivables and on the foreclosure proceedings relating to such receivables of the banks taken over by it either in accordance with the Act on Procedures for the Collection of Public Receivables or the Bankruptcy and Execution Act. With a view to prevent any possible dispute and save time, the Fund is empowered with the authorities of the Ministry of Finance, the collection agency and the other agencies and commissions granted under the Act on Procedures for the Collection of Public Receivables. In this respect, the Fund can pursue the claims either through its collection department or the tax office where the debtor is domiciled or his head office is located.

Further, the Fund may recover losses of the private banks under its administration and control, by way of conservatory measures including attachments or injunctions, on any rights, movable or immovable assets and receivables of real persons or of legal entities in financial distress that are extended credit or security illegally or through the evasion of law by the shareholders or managers of such banks. The Fund is also empowered to value such assets and reclaim the banks' debts, avoiding lengthy court cases and to request the convention of the bankruptcy administration with its representative.

  • Other improvements in the collection ability and procedure of the Fund. Certain amendments to facilitate the operation of the collection department to deal with distressed assets have been made. As a result of these amendments, the banks under the administration of the Fund, the Fund and the bankruptcy administration of the banks liquidation of which is carried out by the Fund are no longer subject to the provisions of the Act on the Court Fees while collecting their claims through lawsuits or any legal proceedings.

In order to speed up the judicial process, a commercial court of first instance is empowered to deal with the civil cases brought up against banks controlled by the Fund, the Fund itself and the bankruptcy administrations of the banks. In addition, the Fund is conferred with special debt recovery powers. In the event of transfer or acquisition of the shares of the banks shares of which are entirely or partially owned by the Fund, the Fund is empowered to continue the lawsuits and other legal proceedings which are initiated against the former shareholders, managers and the auditors of the bank, as legal successor for effective follow up after such transfer or acquisition.

  • Prerequisites for mergers and acquisitions of banks. With regard to permission required for any acquisition or transfer of shares that result in - directly or indirectly - the acquisition of a bank's management and control by a shareholder, it is provided that the paid up capital of that bank be increased to the capital holding sought for the establishment of banks in Turkey (which is TL 20 trillion ($16.7 million)) in a year starting from the date of permission.

In addition, pursuant to the main principle embodied in the Banks Act, the acquisition by one person directly or indirectly of a minimum stake of 10% or more in the capital of a bank is subject to the approval of the Board. However, where the acquisition involves preference shares which give their holder the right to appoint members of the board of directors and the board of auditors, this acquisition will be subject to the Board approval, irrespective of the 10% threshold referred to above.

In conjunction with the mergers and acquisitions of the banks, the Board has issued a Decree on the eligibility requirements for applicants interested in, among other things, acquiring shares in an existing bank (the "Decree"), which specifies a set of requirements for investors (whether foreign or not) for acquiring the shares of a Turkish bank. These requirements are in parallel to the requirements sought in the founders of a bank in the Banks Act and are:

  • investors should have adequate financial resources and capability that of a founder or a shareholder of a bank. The adequacy of financial capability must be assessed on the basis of criteria such as: (i) the funds necessary to acquire shares should have been procured from commercial, industrial or other activities that are legal; and (ii) the financial resources forming such capability should not have been acquired through unregistered activities;
  • the capital subscribed or the consideration payable for the acquisition of shares should be provided free of any simulation. The investor should, when required, be able to disclose the source of the funds they intend to use for their capital subscriptions or acquisition of shares with such clarity that will avoid any doubt;
  • real person shareholders of the investor, if any, must have the reputation that a bank owner is expected to have. Reputation will be assessed on the basis of criteria such as having a good character and being virtuous, not having been involved in suspicious activities, not having displayed a moral weakness in discharging his obligations, and having a reputable past;
  • such investor should not: (i) have been declared bankrupt or obtained a court judgment for the rescheduling of its debts; (ii) have, directly or indirectly, 10% or more shareholding in any banker, bank, insurance company or any other institution engaged in money and capital markets that has been subjected to liquidation or in any bank transferred to the Fund; (iii) have directly or indirectly, 10% or more shareholdings in any bank which is being subject to legal proceedings as a result of audits conducted pursuant to the Banks Act; (iv) have a shareholding in any such bank which is less than 10%, but through which it holds preferred shares entitling him to appoint members to board directors or board of auditors; or (v) have been convicted of any crime including, simple or aggravated embezzlement, extortion, bribery, theft, fraud, falsification, abuse of trust or smuggling offences, other than smuggling of people and goods, conspiring in public contracts, procurements and sales, money laundering or disclosing government secrets, tax evasion or attempt to evade taxes or taking part in any tax evasion attempt, excluding negligent offences even if he has been pardoned.

Further, the investor must provide any additional information or document, which may be required by the Agency, in order to prove that it meets the requirements set out above. Moreover, a law introducing tax advantages in mergers and acquisitions of the banks such as the elimination of the requirement of the two year holding period for property and subsidiaries to be eligible for corporate tax exemption and reduction of withholding tax on exempted income generated from the sales of these properties and the subsidiaries, is ratified by the prime minister and submitted for the approval to parliament.

Banks in financial difficulty and privatization

A key element of the Economic Programme, as indicated above, has been announced to be a radical bank reform concerning the rehabilitation of banks in financial difficulties and state-owned banks. Accordingly, as a first step, all the banks taken over by the Fund (excluding Demirbank) have been put under the joint board of management by April 2001 and some of them are merged under a bridge bank. The banks that are not sold to the private sector at the end of the auction period will either be merged under a second bridge bank or liquidated before the cost of the takeover operation runs into billions of dollars. As a second step, banks with existing or potential financial difficulty will be taken over by the Fund should their owners be unable to provide sufficient capital injection.

As to the state-owned banks, in line with the banking reform, which envisages to reduce the number of non-profitable state-owned banks under the umbrella of one big state bank, the management of the two largest state banks, Ziraat Bank and Halk Bank, is strengthened through the establishment of a common and politically independent governing board. As a next step, it is expected that two state banks - Emlakbank and Ziraat Bank - will be merged under Ziraat Bank's umbrella and Emlakbank's liabilities and assets will be transferred to Ziraat. Thereafter, unproductive branches of such banks will be shut down, their assets will be disposed of and the workforce will be reduced by providing retirement incentives.

In addition to the privatization of the Halk and Ziraat Banks within three years, which had been the main concern of the World Bank, another state-owned bank Vakif will be privatized in due course of time as the market conditions allow.

Two of the most significant outcomes of the operation in regard to the state banks are the ending of the interest rate competition among such banks and of the political manipulation over them.

Conclusion

It is apparent that Turkey is going through a hard economic recovery period. Since the main reason for the two recent financial crises was rooted in the banking system's failure in complying with a sound credit mechanism, a radical banking reform facilitating the re-integration of the Fund banks into the system to restore the deficiencies observed in collecting banks' receivables became primary targets of the legislatures in promulgating the amendments to the Banks Act No.4389.

We believe that the restructuring in the banking sector meets the gaps inherent in the sector and will enhance the speedy functioning of the mechanisms envisaged in the Banks Act No. 4389. As far as the banks in financial difficulty are concerned, the restructuring with the proper performance of the government's rehabilitation policy, will considerably relieve the banking sector. Nevertheless, it should not be ignored that any reform effort would be a lengthy process.

It is possible to conclude that the restructuring programme and its implementation will establish a sound Turkish banking sector that will promote to Turkey's economic growth and stability.


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