Derman Ortak Avukat Bürosu
On June 18 1999, a new Banks Act (numbered 4389) was introduced in Turkey. Replacing the previous banks act (numbered 3182), the new act aims to create a safer, more regulated environment for existing banks in Turkey as well as operational policies similar to those envisaged under the Basle Accord. The new legislation also contains important provisions which increase the barriers to entry for new banks by imposing a much higher minimum capital requirement and payments of certain fees for issuance of new banking licences.
The Act comes against a backdrop of several high profile banking failures in Turkey in the last five years. The period 1993-8 saw the takeover of four private banks by the Savings Deposit Insurance Fund, an arm of the Turkish Treasury. To reduce the chance of further takeovers, the new government in Turkey made the Banks Act one of its first priorities.
The Banking Regulation and Supervision Authority
The Banks Act provides for a new governmental entity to regulate the industry: the Banking Regulation and Supervision Authority (BRSA). Similar to the Financial Services Authority in the UK, the BRSA will be the central regulatory authority with respect to banks licensed to operate in Turkey. However, the BRSA will not — at least for the time being— have any supervisory powers over other financial institutions such as factoring, insurance, leasing and brokerage companies.
The primary executive body of the BRSA will be the Banking Regulation and Supervision Board. The Board will be comprised of seven members to be appointed by the Council of Ministers from among candidates nominated by the Undersecretariat of Treasury, the Ministry of Finance, the Turkish Banks Association, the State Planning Organization and the Capital Markets Board. The Council of Ministers will appoint the president of the Board who will also serve as the president of the BRSA.
Once operational, the Board will be vested with powers including:
- implementation of the Banks Act and, enactment and implementation of regulations, decrees and communiqués promulgated under the Act;
- on-site and off-site audits of banks;
- granting preliminary approvals for (a) the establishment of new banks or branches of foreign banks in Turkey; (b) opening of branches or representative offices abroad by Turkish banks; (c) opening representative offices of foreign banks in Turkey; (d) establishment of bank subsidiaries abroad; and (e) participation in existing foreign companies by Turkish banks;
- taking all necessary measures for the safety and soundness of the management of banks including but not limited to removing or appointing directors of a bank, limiting the activities of a bank, increasing the deposit insurance premiums for a bank, increasing the capital of a bank provided that the increased amounts will be paid by the shareholders or the transferees of subscription rights to be approved by the Board or the SDIF, recommending to the Council of Ministers to revoke the banking and deposit taking licences; and
- determining the principles of establishing new banks engaging specifically with offshore banking activities in Turkey.
Establishment of new banks
The Banks Act provides for two separate approvals to be obtained. The first is to be given by the Council of Ministers upon the recommendation of the Board. At least five of the seven members of the Board must recommend the establishment of the bank or the branch.
The Banks Act defines credits as follows: (i) cash loans; (ii) non-cash loans such as guarantees, suretyships, endorsements and acceptances; (iii) bonds or similar capital markets instruments purchased by the bank; (iv) all advances; (v) forward sale of receivables; and (vi) cash loans and cash equivalent of non-cash loans past due.
Previously, the definition of credit did not include the items set forth in (iv) and (v) above and the new definition also broadens the application of the lending limits.
The Banks Act increases the permitted general credit exposure of a bank to all legal or real entities from 20% to 25% of net equity (defined as paid in capital plus reserves plus other capital-like funds to be determined by the Board). In accordance with the Banking Directives of the EU, loans exceeding 10% of a bank's net equity and granted directly or indirectly to a single entity are defined as significant loans and the aggregate amount of such loans is limited to eight times a bank's net equity.
The aggregate amount of loans or credits granted to entities with indirect credit relationship (ie those linked through family relationships) cannot exceed 50% of the bank's net equity. Previously this limit was 75%.
For purposes of lending limits only 25% of non-cash credits will be taken into consideration. This ratio was previously 50 %. Banks have been given a grace period of four years to achieve compliance with the limits set forth in the Banks Act.
Overall the legislation represents an important attempt to create a reliable banking environment in Turkey. It seeks to establish, for the first time, a central supervisory and regulatory body for the banking industry, replacing the previous arrangement of these functions being exercised by various institutions including the Treasury and the Central Bank. The capital requirement clauses introduced under the new legislation will also make it more difficult to establish a bank in Turkey and will effectively control the growth in the number of banks licensed.
In addition, the Board will have broad powers to be able to take remedial action in cases where banks develop a weak financial position. The only question which remains is how far the BRSA and its appointees will operate independent of the political environment in Turkey. Time will tell. Appointments to the Board will be made within a three month deadline of the Act becoming law.
Emre Derman - Aydin Düren