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Turkey: Implementing Basel III

Işıl ÖktenAslıhan Kahraman

On October 23 2015, the Banking Regulation and Supervision Agency (the BRSA) published amendments to the Regulation on the Equities of the Banks (the Regulation). These amendments are intended to harmonise the Turkish banking regulations with Basel III, the comprehensive reform package developed by the Basel Committee on Banking Supervision to strengthen the regulation and risk management of the banking sector. The amendments will enter into force on March 31 2016 (the Amending Regulation). The Amending Regulation introduces the following key changes:

  • Profits derived from the cancellation of shares and free provisions reserved for potential risks are removed from the calculation of a bank's core capital. Share premiums of qualified shares, which are not included in the core capital, are included in Tier I capital;
  • If a bank's core capital adequacy ratio or consolidated core capital adequacy ratio drops below 5.125%, the bank should be entitled to deduct the value of Tier I debt instruments or convert them into shares, to restore the ratio of 5.125%, without obtaining the BRSA's permission. Banks are obliged only to inform the BRSA immediately upon the occurrence of such an event;
  • If it becomes probable that: (i) the bank's operating licence may be revoked; or (ii) management of the bank may be transferred to the Savings Deposit Insurance Fund, in each case pursuant to Article 71 of the Banking Law Number 5411 (the Banking Law), then the Tier I and Tier II debt instruments may be written down or converted into shares upon the decision of the BRSA. The Amending Regulation requires that: (i) these events occur as a result of the losses incurred by the bank; and (ii) the aforementioned write down or conversion into shares of debt instruments constituted in Tier I or Tier II capital is carried out to set-off such losses incurred by the bank;
  • The loans and debt instruments included in the calculation of Tier I capital will not be taken into account among the bank's obligations in the case of the triggering of a non-viability event based on the implementation of the Article 71 of the Banking Law;
  • The Amending Regulation clarifies that a prepayment of the principal of the Tier I and Tier II debt instrument shall be approved by the BRSA;
  • Previously, pursuant to the Regulation, if the BRSA permitted, any amounts the shareholders had committed to increase the bank's capital, which was pledged in favour of the bank, subordinated, had not accrued any interest, and which was not collaterised or linked to any derivative, used to be included in calculation of Tier II capital. The Amending Regulation deletes this item;
  • The Amending Regulation introduces new capital deduction items that will be applied to the calculation of a bank's equity, mostly relating to valuation techniques. It removes the provision stating that direct or indirect investments made by a bank into its own core capital, Tier I capital and Tier II capital shall be deducted from the same, respectively.

It is expected that there will be further changes to the Regulation as the BRSA has also published a draft regulation that proposes certain other amendments.

Işıl Ökten and Aslıhan Kahraman

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