Transcript An Overview of the BRSA and its Activities

From Crisis to Stability:
Restructuring of
the Turkish Banking Sector
A. Teoman Kerman
Vice President
“Strong Banking Sector, Strong Economy”
Outline

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Structural problems
Impact of the crisis
Restructuring strategy
 Restructuring of the state banks
 Resolution of the SDIF banks
 Strengthening of the private banks
 Improving the regulatory and supervisory framework
Results of the restructuring
Remaining challenges and BRSA agenda
Lessons learned
“Strong Banking Sector, Strong Economy”
1
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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Licensing of banks 1980-1999
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56 banks were licensed (42 deposit banks and 14
Development and Investment banks)
15 of the 20 intervened banks were licensed in the post-1980
period; of these 13 were licensed in the 1990s.
Ownership details of intervened banks:
 6 were media groups
 12 were conglomerates
 Remaining 2 were cooperatives and pension funds
Asset size of these banks were about 21 billion USD while
their liabilities were about 30 billion USD (shareholders equity
excluded)
“Strong Banking Sector, Strong Economy”
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Asset growth 1980-2000
100
155
145
135
125
115
105
95
85
75
65
55
45
35
25
15
80
70
60
Percentage
90
50
40
30
19
8
19 0
8
19 1
8
19 2
8
19 3
8
19 4
8
19 5
8
19 6
8
19 7
8
19 8
8
19 9
9
19 0
9
19 1
9
19 2
9
19 3
9
19 4
9
19 5
9
19 6
9
19 7
9
19 8
9
20 9
0
20 0
0
20 1
02
Billion $
Asset Size of Turkish Banking System and
Asset Size / GNP
Asset Size (Left Axis)
Asset Size/GNP (Right Axis)
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Large FX open positions of private banks
2000
140
0
-954
110
-1049
-2000
-2056
-1487
321
-1
-86
-334
-341
-991
-394
-454
252
152
122
-114
-4000
-6000
Crisis
-8000
-8960
-10000
-10674
On-balance sheet positions
March 03
Jan. 03
Dec. 02
aug. 02
June 02
March 02
Dec. 01
June 01
Feb. 01
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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State banks: pre-crisis conditions
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Liquidity problems
State banks with over-night liabilities of $14 billion
Low asset quality
Inadequate risk assessment and management
systems
Lack of good corporate governance
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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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November and February 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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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, there has been a significant burden-sharing as $7.1
billion of the restructuring costs were borne by the private
sector.
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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
“Strong Banking Sector, Strong Economy”
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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
Financial restructuring
of the state banks
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Liquidation of duty losses

( $19 billion)
Elimination of the over-night liabilities

( From $14 billion in March 2001 to zero in 2002)
Strengthening of the capital base

($2.9 billion)
Appropriation in the budget for any subsidies provided
through the state banks
Determination of deposit rates uniformly with market
rates
Efficient management of the loan portfolio
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Operational restructuring of the
state banks

Appointment of a Joint Board of Directors

Monitoring program for profitability, liquidity, and interest
margins

Establishment of internal control, financial control and
risk management units

Improved efficiency and productivity
 As of December 2002, number of branches and
personnel were reduced by 32% and 51%, respectively,
compared to December 2000.
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Intervention of the insolvent banks
by the SDIF
November 2000
Crisis
The Government’s Declaration to
Expand the Scope of
the Guarantee covering all liabilities of SDIF banks
Liquidation limited by
Direct liquidation after
the scope of the
takeover by the SDIF
existing deposit insurance
•Internal/external confidence
loss to the financial system
•Bank runs (Indonesian example)
•Withdrawal of deposits
from the banking system
(Total deposit $75.5 billion)
•
$ 26 billion cash requirement instead of
transferring funds in the form of
Government Securities to the SDIF
• Need for over-borrowing
• Excessive pressure on interest rates
• Impossibility of sustaining the debt
service
Resolution under
the SDIF
•Legal process has been shortened
compared to direct liquidation
•Resolution process has been facilitated
through deposit transfers
•Some portion of employees were kept
employed through branch/bank sales
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Rapid resolution of the intervened banks

20 banks were taken over by the SDIF
1 bank in 1997
1 bank in 1998
6 banks in 1999
3 banks in 2000
8 banks in 2001
1 bank in 2002

Law Nr.3182
Law Nr.3182
Law Nr.3182 (1), 14.3 (1), 14.3/14.4 (4)
14.3 (1), 14.3/14.4 (2)
14.3 (3), 14.3/14.4 (5)
14.3/14.4
The resolution of these banks through merger,
transfer, sale or liquidation within 2 years
(As of today only 2 banks remain under SDIF)
“Strong Banking Sector, Strong Economy”
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Resolution Process of the SDIF Banks

Financial Restructuring;
 Elimination of over-night liabilities
 Reduction of FX open positions
 Determination of deposit rates uniformly with market
rates
 Auction of deposits of about $3bn to other banks
 Transfer of liabilies to other banks

With operational restructuring, significant reduction in the
number of branches and personnel
 Excluding 2 remaining banks number of branches were
reduced to 6, personnel to 583.
 With bank sales, a total of 10,337 jobs were kept.
“Strong Banking Sector, Strong Economy”
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Initial costs of resolving the
intervened banks
Billion USD
Public Funds (a-b)
a.Bonds issued by Treasury
b.Bonds returned by the SDIF
Funds Provided from Private Sector (c+d)
17.1
18.5
1.5
4.7
c.Deposit support from SDIF revenues
2.6
d.Capital support from SDIF revenues
2.2
TOTAL
21.7
Most of these funds were used for meeting the deposit
liabilities (total $26 billion) of the SDIF banks through
payments and/or transfer.
“Strong Banking Sector, Strong Economy”
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Legal obstacles to a rapid collection of
assets of intervened banks

SDIF has collected a total of $1.7 billion via direct
collection, sale of subsidiaries, tangible and
intangible assets and bank sales.

Dragging legal porcedures and lawsuits are a
major impediment to rapid collection.
“Strong Banking Sector, Strong Economy”
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Strengthening
ofBankalar
the private banks
Özel

Debt swap operation: Private banks’ FX open
position to $1.5 bn in December 2001 from $8.4 bn
at end-2000

Lower interest rate risks: Issuance of floating rate,
FX indexed and FX denominated government
bonds

Financial and Real Sector Council: to develop
strategies to resolve NPLs and to restructure
corporate debts
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Recapitalization scheme for the private
banks

Rationale
Increase in potential credit risk
 Deep-rooted structural problems
 Deeper than expected recession
 Adverse international environment
Limited possibilities of liquidation of assets in current economic
conditions
Limited scope for raising new capital from domestic and foreign
private investors
Vicious cycle of banking crisis-real sector crisis
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Recapitalization scheme for the private
banks
Objectives

To ensure transparency and enhance confidence in banking
sector

To maximize capital contributions by banks’ owners

To encourage mergers and acquisitions
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To enable banks to start extending credits to real sector

To facilitate corporate debt restructuring

To restore market discipline
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Recapitalisation Program Phases
Start of the
procedure
with the
completion of
the legal
framework
Announcement
of BRSA’s final
assessment
results to the
banks
Completion of
appropriateness
control (second
audit) Submission
of
01.02.02
22.04.02
Merger&
Finalization
Acquisition
of
plans
the first
(where
audit
01.04.02
relevant) to
BRSA
15.05.02
Meetings
of General
Assemblies
Realization
of capital
increases
30.06.02
Application
to BRSA for
support
Realization
of the
capital
support by
Public
30.04.02
Assessment
Phase
Bank
Recap.
Phase
“Strong Banking Sector, Strong Economy”
State
Recap.
Phase
23
Results ofÖzel
theBankalar
Audit Process
The transparency of the banking sector has increased.
 The ability of the public sector authority to design
and apply sound policies towards the establishment of
a healthy and efficient banking sector has been
improved.

Statistical Results:
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
The total capital needs of the 25 banks have been determined
as 866 mil. $
After negotiations, 720 mil. $ of the capital needs has been
covered by banks and with other positive developments (e.i.
decline in int.rates increased the value of gov’t papers).
Remaining capital needs was 146 mil.$.
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Asset
size of the recap banks decreased from 69 bil. $ to 66 bil.
$ after auditing.
Important revisions in loans and NPL’s
(loans decreased from 29,2 tril.TL to 24 tril. TL and NPL’s
increased from 2,3 tril. TL to 7,8 tril. TL
The collaterals of loans have been examined and updated by
experts and real estate valuaiton agencies. (declined from 35,8
tril. TL to 30,4 tril. TL)
 Inflation Accounting: Inflation adjustments for the nonmonetary assets realized.
 After the auditing process the own funds increased and the
risk weighted assetes decreased. As a result the sector’s average
CAR realized as 14,8%.
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Results of Özel
theBankalar
Recap Scheme
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
Banks realized capital increase of $2.4 billion from
their own resources.
As a result of the three-stage audit, 3 banks were
found to be capital deficient.
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1 bank applied for state support and received
subordinated debt to reach 9% capital adequacy ratio.
Another bank’s capital need was covered in cash by
shareholders. The capital increase process was finalized
as of September 2002.
Pamukbank, with a capital deficiency of about $2 billion,
was transferred to the SDIF
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Improving
the
regulatory
and
Yasal ve Kurumsal Düzenlemeler
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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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
“Strong Banking Sector, Strong Economy”
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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.
“Strong Banking Sector, Strong Economy”
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Effects on the private sector

Istanbul Approach
A total of $3.8 billion of loans of 135 firms were
restructured.

Increased credit extension
Credits rose to $29.4 billion in 2002 from 23.4 billion
in 2001.
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Although certain risks have been
decreased to more manageable levels...
Interest Rate Risk
Issuance of bonds with variable interest rates
Distortions created by state banks and insolvent banks eliminated

Credit Risk
Adequate classification of NPLs after the 3-stage audit
Realistic assessment of collateral
Necessary provisions have been set aside

FX Risk
Issuance of FX-indexed bonds
Implementation of floating rate regime
Improvements in risk management

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...some risks still remain

Despite Istanbul Approach share of NPLs are still high
Total sector Loan Loss Ratio = 17.8%
For 25 Re-cap banks this ratio is 10.1% in 2002 compared to
24.7% in 2001

Short-term maturity structure of deposits
More than 90% of the deposits have a maturity of less than 3
months

57% of the deposits are in FX
High share of Government bonds in the balance sheet
For Private Banks in 2002
Securities /Total Assest= 33.3%
Low level of free capital
High level of operational costs



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BRSA’s agenda

Rationalization of intermediation costs

Establishment of financial holding companies

Providing a level playing field in the sector

Establishment of secondary markets for distressed debt

Incentives for rapid resolution of NPLs

Compliance with BASEL-II Accord

Risk based supervision
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Challenges faced
by the BRSA

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Legal obstacles
Lack of political backing and consensus
Intense lobbying by pressure groups
 Relationships between media and bank groups
 Public awareness
Institutional draw-backs
 BRSA - SDIF relationships
 Institutional development of BRSA
Lack of secondary markets for distressed debt
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Key Lessons: Restructuring instruments
utilized by the BRSA

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

Introduction of blanket guarantee
Voluntary debt swap (TL to FX indexed)
Tax incentives for merger and acquisitions
Tax incentives to lengthen maturity of deposits
Merge then resolve (sell or liquidate) strategy
Superpowers granted to the SDIF to accelerate collection
SDIF deposit auctions
Re-capitalization scheme and provision of Tier-II capital
Agree on protocols to accelerate collection process and to
minimise costs
Voluntary corporate debt restructuring (Istanbul Approach)
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