Transcript Costs of EU Accession:The Potential Impact On the Turkish

Costs of EU Accession:
The Potential Impact On the
Turkish Banking Sector
Dr. Ceyla Pazarbasioglu
Vice President
“Strong Banking Sector, Strong Economy”
Outline





Structure of the banking sector and the impact of the crisis
Restructuring strategy and results
 Restructuring of the state banks
 Resolution of the SDIF banks
 Strengthening of the private banks
 Improving the regulatory and supervisory framework
A comparison of the Turkish and EU banks
Foreign bank entry and impact on competition
Compliance with the EU Banking Legislation
“Strong Banking Sector, Strong Economy”
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Pre-crisis structural problems

Small scale and segmented market structure
1980
1990
1999
2000
31
54
62
61
8
7
4
4
Private
19
25
31
28
Foreign
4
22
19
18
SDIF
-
-
8
11
6
10
19
18
State
4
3
3
3
Private
2
4
13
12
Foreign
-
3
3
3
37
64
81
79
Commercial Banks
State
Invest. & Dev. Banks
TOTAL
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Large FX open positions of private banks
2000
-2056
-1487
-991
-334
-341
-394
-454
Jan. 03
-2000
-1049
-86
252
-114
Dec. 02
-954
110
-1
aug. 02
140
0
321
152
122
-4000
-6000
-8000
Crisis
-8960
-10000
On-balance sheet positions
March 03
June 02
March 02
Dec. 01
June 01
Feb. 01
-10674
Nov. 00
-12000
Net Position
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Crowding out by government
53,7
47,0
42,5
Percentage
60
55
50
45
40
35
30
25
20
15
10
5
0
40,8
30,6
6,4
1980
10,3
10,6
1990
1995
Securities / T. Assets
35,0
21,4
20,0
2000
2001
22,8
2002
Loans /T.Assets
Note: 2001 and 2002 data reflect the results of the three-stage audit process and are inflation-adjusted.
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Summing up: Pre-crisis conditions


Banks
 Liquidity problems
 State banks with over-night liabilities of $14 billion
 Large open positions of the private banks
 Significant share of holdings of government debt
 Low asset quality
 Inadequate risk assessment and management systems
 Lack of good corporate governance
Operating Environment
 Major macroeconomic instability
 High public sector deficit
 Systemic distortions created by state and weak banks
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Banking and Currency Crises
Impact on the
Banking Sector
Macroeconomic Shocks
Sharp
increase in interest rates


Sharp
depreciation of the
Turkish Lira
Contraction
activity
Maturity mismatch 
funding losses
Decline in the value of
securities portfolio

Short-positionsFX losses

Asset Quality
Credit Risk
in economic

Result:
Erosion in Capital Base
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But crises also provide opportunities
for major restructuring

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
Banking System Restructuring Program
announced on May 15, 2001
Objective is to eliminate distortions in the
financial sector and adopt regulations to
promote an efficient, globally competitive and
sound banking sector
4 Main Pillars
 Restructuring of the state banks
 Resolution of the SDIF banks
 Strengthening of the private banks
 Improving the regulatory and supervisory
framework
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Goal: Sound banking-strong economy
Sound Banking
State Bank Reform
Banking Sector
Restructuring
Program
Strong Capital Base
Cost Efficiency

Strong Economy
and Sustainable
Growth
Environment
Efficient
Supervision
Market Discipline
and Transparency
Corporate
Restructuring
•Structural Reform
•Macroeconomic Stability
•Decline in Public Deficit
Results of operational restructuring

Consolidation in the banking sector
Number of banks declined from 81 in 1990 to 53 as of
April 2003

Decline in the share of the State and the
SDIF banks
During 2000-2002 the share of these banks in total
loans and deposits from 34.2% to 18% and 53.3% to
39.3%, respectively.

Increase in mergers and acquisitions
Total asset size of the mergers and acquisitions that
took place in the sector is around $26.5 billion
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Results of financial restructuring


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Reduction of financial risks to manageable levels.
Improved transparency
Improved profitability
In 2002 private banks generated a profit of $1.5
billion, state banks generated a profit of $646
million
Strengthened capital structure
CAR rose to 27.1% in December 2002 from 9.3% in
December 2000.
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Improving the regulatory and
supervisory framework
Moving towards international standards
 Regulations on capital
 Regulations on risk management
 Regulations on credit and subsidiaries’ limits and
loan loss provisioning
 Accounting standards and independent auditing
 Regulations on facilitating mergers and acquisitions
 Regulations on special finance houses
 MoUs with other countries supervisory authorities
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Turkey is not the first nor the last country
to experience a financial crisis
Country
Crisis Period
Total Cost/GDP (%)
Spain
Japan
Indonesia
1977-1985
19901997-
16.8
20.0
50.0
Malaysia
S. Korea
Mexico
Argentina
199719971995
1980-82
20.5
26.5
20.0
55.3
Brazil
1994-96
15.0-20.0
Turkey
1999-2002
13.7-26.5
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The initial fiscal costs of the Turkish
crisis have been high
BillionUSD
Ratio to GDP (%)
19.0
12.8
2.9
2.0
21.7
14.9
-Public Resources
17.0
11.7
-Private Resources
4.7
3.2
State Banks Duty Losses
Capital Support to State Banks
Resolution of SDIF banks
In addition, private banks raised $2.4 billion of capital from own
resources.
Thus, much of the costs of adopting international standards have
already been borne. Annualized costs of $4bn have been incurred
which can be thought of harmonization costs.
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Turkish
banks
have
similar
concentration ratios to EU average
Graph 1: Concentration Ratio of 5 Largest Banks (%)
80
75,8
59
57,7
%
60
40
20
0
EU Average
Candidate
Countries Average
Turkey
2001
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While the share of the state banks
remain very high in Turkey
Graph 2: Public Share (%)
40
33
24
%
30
20
10
10
0
EU Average
Candidate
Countries Average
Turkey
2001
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Although capital adequacy is high,
free capital remains limited
Graph 3: CAR
20
%
15
16,24
16,5
12,04
10
5
"
0
EU Average
Candidate
Countries Average
Turkey
2001
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Blanket
guarantee
introduced
during the crisis in Turkey
Graph 4: Deposit Insurance
40.000
30667
27027
Euro
30.000
20.000
11939
10.000
0
EU Average
Candidate
Countries
Average
Turkey
2001
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Low financial intermediation by
Turkish banks
Graph 8: Financial intermediation indicators
500
474
400
%
300
200
186
117
94
167
83
100
61
57
19
0
Assets/GDP
Deposits/GDP
Loans/GDP
2001
EU Average
Candidate Countries Average
“Strong Banking Sector, Strong Economy”
Turkey
18
Size of the banking sector is small
Value (million Euro)
Graph 5: Average Bank Size (Total Assets / # of banks)
6.000
5.000
4.000
3.000
2.000
1.000
0
4.494
2.472
1.025
EU Average
Candidate Coun.
Ave.
Turkey
2001
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Over-branched banking network
Graph 6: Number of Branches per Bank
Value
150
113
100
50
36
33
EU Average
Candidate
Coun. Ave.
0
Turkey
2001
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Government crowding-out
Graph 16: Debt Securities / Total Assets
34,5
Turkey
European
Union
21,68
0
10
20
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30
40
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Literature on foreign bank entry
Features that attract foreign banks:
 liberalization of financial markets
 degree of economic integration between host and parent
countries
 support
of the client base (“follow the client”)
(Konopielko,1999; Clarke at al, 2001).
 profit opportunities, low taxes (Claessens et al., 2001;
Clarke at al, 2001)
 fewer regulatory restrictions for investment (Clarke at al,
2001).
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Expected benefits of foreign bank entry
Claessens et al., 2001; Konopielko, 1999
 increase in efficiency and better resource allocation
 increase in competition
 broad application of modern banking technology
 increased access to international capital markets
 stimulate development of supervisory and regulatory
practices
“Strong Banking Sector, Strong Economy”
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Potential disadvantages of
foreign bank entry
Crystal et al (2002) and Stiglitz (1993)
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difficulties to compete with large international banks
lower access to financial services by domestics as
foreign banks generally serve to multinational firms
less sensitivity to host country’s government policies
vulnerability to economic conditions in the home
country
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Market share of foreign banks
1994
Korea
Thailand
Malaysia
Brazil
Colombia
Mexico
Peru
Venezuela
Argentina
Czech Republic
Poland
Chile
Hungary
1999
Turkey (June 2002):
% 4.9
0
10
Source: Bankscope; IMF, 2000.
20
30
40
50
60
(%)
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Turkish experience
Despite...
 a long history of liberalization policies and practices
 advanced technological facilities
 qualified human capital in banking sector
...foreign bank presence has been limited due to:
 persistent macroeconomic instability (high and volatile inflation)
 low volume of foreign direct investment
 delays in taking necessary steps for financial sector reforms
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Recent increased interest

Increased interest in the aftermath of the bank
restructuring program
Unicredito 49% of Kocbank shares
HSBC acquired Demirbank

However further measures are necessary to attract
foreign investors
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Need to reduce intermediation costs
60,0
55,0
50,0
45,0
40,0
From TL deposits to TL corporate credits
% 56,1
Banking and insurance transaction
tax, stamp duties, premiums
Liq. requirements, dep.ins.
premiums
Withholding tax, special
% 48,6
% 46,0
transaction tax
% 37,9
35,0
30,0
Net interest rate
25,0
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Need to reduce intermediation costs
12,0
From FX deposits to FX credits
% 10,3
10,0
8,0
6,0
4,0
2,0
Banking and insurance
transaction tax, stamp
Liq. Req., dep.ins.
premiums
Withholding tax,
% 6,7
% 5,0
% 4,0
Net interest rate
-
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Need to overhaul blanket guarantee

BRSA/SDIF is working on a deposit insurance scheme
 Elimination of blanket guarantee
 Adoption of a limited guarantee scheme in
accordance with EU standards (20,000 Euro) with a
one-year transition period
 Redefining protection coverage in favor of domestic
currency.
 Transition to a risk based premium structure in
which risk is fairly priced.
 Application of co-insurance in order to limit
potential claims on the insurance system.
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Quantitative Impact Study (QIS)
Date of
exercise
No. of banks
participating
No. of
countries
participating
Scope
QIS 1
Autumn 2000
78
10
Standardised
Foundation
Advanced
QIS 2
Summer 2001
138
25
Standardised
Foundation
Advanced
QIS 2.5
Autumn 2001
37
12
Foundation
QIS 3
Autumn 2002
300?
Almost 300
50?
Almost 50
Standardised
Foundation
Advanced
All portfolios
including
securitisation
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Summary QIS-2 Results
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