U N I T E D N A T I O N S C O N F E R E N C E O N T R A D E A N D D E V E L O P M E N T MULTI-YEAR EXPERT MEETING ON SERVICES, DEVELOPMENT AND TRADE: THE REGULATORY AND INSTITUTIONAL DIMENSION Geneva, 23-24 February 2012 FROM CRISES TO FINANCIAL STABILITY: TURKEY EXPERIENCE Mete Bumin Head of Foreign Relations Department Banking Regulation and Supervision Agency of Turkey
FROM CRISES TO FINANCIAL STABILITY: TURKEY EXPERIENCE Mr. Mete BUMİN Head of Foreign Relations Department Banking Regulation and Supervision Agency of Turkey The recent financial crises affected all developed and emerging countries without exception and shook the global economic system. However, Turkey which was affected from the crisis the least, recovered the impacts of crisis the fastest in such an environment. During the recent crises period, Turkish banking sector have not suffer from losses, have not received government support and even deposit insurance limits were not increased. Turkish banking sector has a strong and stable structure and it was not easy to reach such a point. In order to understand strong structure of banking sector in Turkey, the recent past of banking sector in Turkey should be analyzed. As it is very well known, in 90 s, instabilities in global economy were high. During the Gulf War, Russia and Asia crisis, Turkey, like other emerging countries, frequently experienced financial dilemma due to its domestic fragilities and structural weaknesses. Failure to preserve stability programs that had been put into practice due to several reasons increased economic problems as well. As a matter of fact, in year 2000, weak growth performance, unsustainable public sector imbalances, macroeconomic instability which arose in consequence of unsustainable domestic borrowing as well as high and fluctuated inflation increased more accompanied by the worries on financing current transactions. In this period, structural problems in Turkish banking sector caused the crises in November 2000 and February 2001 to deepen and eventually to turn into a systemic banking crisis. As a result of the these crises, 22 banks were failed and transferred to the Savings Deposit Insurance Fund (SDIF). State banks and private banks were also affected severely by these crises. In such an environment, the Banking Regulation and Supervision Agency (BRSA) was founded in August 2000. Savings Deposit Insurance Fund which would continue to operate as a separate institution afterwards had been organized under the BRSA. The Agency, which experienced two major crises as soon as it was founded, made important and proactive resolutions despite all impossibilities. Due to the impacts of November 2000 and February 2001 crises, in order to restore financial structure and profitability performances of banks that worsened, the Banking Sector Restructuring Program was put into practice in May 2001. The program aimed at; Restructuring state banks, Resolving the banks transferred to the SDIF, Rehabilitating private banks, Strengthening surveillance and supervision framework, Increasing competition and efficiency in the sector. 1
Within the scope of the Program, capital structures of state banks were strengthened, duty loss receivables were paid off and regulations enabling new duty losses to emerge were terminated, short-term liabilities were liquidated. State banks were restructured operationally; a professional team was constituted in their management, number of branches and personnel were decreased to rational levels. Banks transferred to the SDIF were resolved in a short time through merger, sale or direct liquidation. The non-performing loans of the failed banks were dealt within the scope of powers of the SDIF granted by the Banking Law and the collection incomes have increased significantly. In order to regain the healthier structure of the private banks; foreign exchange open positions were closed dramatically through domestic debt swap made by changing government securities in terms of Turkish Lira with FX-indexed bills, necessary measures were taken about banks determined to have inadequate capital in capitalizing program, balance-sheets of private banks were made more transparent by applying inflation accounting. Within this period, a regulation providing implementation of the mechanisms accelerating the resolution of troubled assets was introduced. One of the most important features of structural reforms realized after 2000 and 2001 crises was paralleling legal framework regarding banking sector on financial reporting and supervision standards with international standards in order to increase transparency and efficient supervision of bank financial statements. Supervision approach was based on riskbased supervision pursuant to the Banking Law amendment in 2005; other countries implementations were analyzied and supervision guidelines were composed accordingly and rating system was adopted. Competition in the sector was activated; transparency was increased, applications which may be called as preventive financial practice built by the BRSA upon the solid foundation constituted by risk-based supervision and proactive approach. During this program, restructuring of banks which were transferred to SDIF and of state banks introduced a cost of USD 53.6 billion which is equivalent to one third of the national income in that period. Thanks to the measures taken after the crises, the sector has improved rapidly. While the negative effects of public banks on the system were decreasing, balance sheet structures of all banks have improved and the stable environment provided the share of global capital to increase. The numbers of branches and personnel which have decreased dramatically in the time of the crises have entered to a regular growing tendency within the following periods and this sound development has contributed to an efficient benefit from information technologies and to expand the customer web. With the return to intermediation activities which is the fundamental function of the sector, loans have become the most increased asset item after the crises. Moreover, the share of individual loans within total loans has also increased. Despite the power of credit expansion, the sharp decrease of non-performing loans ratio has shown that the growth of loans was healthy. Accordingly, within the post-crisis period, the contribution of the sector to the economic growth by loans has increased and the financial deepening has become stronger. Within the post-crisis period while the sector s free capital base showed a constant growth, strong qualitative improvements were seen in own funds components. In parallel with 2
these developments, the sector s profitability has increased and has gained a sustainable quality. Another important reflection of the stability was observed on intermediation costs; while the deposit and loan interest rates have decreased rapidly after the crisis, the burden especially on credit customer has decreased. Due to the difficult times, Turkey has got the lessons from the crises situations and taken the necessary steps which will lead the way for a sound bankins sytem. The Turkey experience has shown the importance of accurate identification of nature and dimensions of problems carrying the sector to the crisis and implementation of a detailed approach devoted to resolve all actual and structural problems and its application with interinstitutional coordination and without concessions. It was also seen that during crises, the priority should be given to the restitution of the confidence suffered from erosion with the measures to be taken as soon as possible. Furthermore, the importance of maximizing the agility and coordination in the political decision-making process, conducting the economic management exclusively, restoring the reputation and benefiting from collaboration with international institutions has come to light. It is clearly understood that strengthening the system and providing permanent stability could only be achieved by developing appropriate policies through establishing cooperation with all institutions rather than individual efforts, and measures for this purpose were reflected to regulations and policies following crisis management and the necessary lessons were taken. The crisis indicated the necessity of monitoring banks with early warning systems to be established before the banks become problematic, rather than reactive practices in resolving problematic bank process. Providing transparency and impartiality in all practices helped Turkey example to be successful. It is recommended to countries which desire to follow similar policies that they ensure determining the real conditions of banks and announce to public, publish financial reports in sector basis periodically and issue publications to inform public on the program that is being carried out. It is observed that regulations which were put into force to determine the problems in the system on time and resolve them rapidly and efficiently are the most important factors in resolving the crisis and securing the system. Due to the strong connection between real sector and banking sector, a problem experienced in one of them cause problems to arise simultaneously in the other. The fact that resolution of crisis began in Turkey with the reforms made in banking sector enabled real sector to recover and grow in a short time. It is understood that problems in real sector should be perceived as a result rather than a reason and analysis should begin with financial sector. Due to the achievements of structurel reforms implemented during 2000 and 2001, Turkish banking sector has faced 2008 crises in a sound manner. Banking Regulation and Supervision Agency which has started to implement proactive measures during this period continued its close surveillance on the sector before and after the 2008 crises. A proactive approach was adopted in regulation activities and operations were initiated for encouraging banks to make savings in periods in which macroeconomic conditions are good so as to be utilized in difficult times. Accordingly, although legal minimum capital adequacy ratio in 2006 was 8%, target capital adequacy ratio application 3
was adopted and banks were asked to reach this target capital adequacy ratio which was determined as 12% on subjects such as opening branches and acquiring subsidiaries. Thereby, it is aimed to prevent banks to grow uncontrolled and they are encouraged to keep more capital against possible risks. It is additionally important for banks to apply minimum liquidity level to meet possible sudden deposit withdrawals. Regulations on liquidity risk which are one of the most significant subjects discussed in post-crisis period on international level and in line with Basel regulations have been applied by the BRSA for years. Another regulation which can be considered as pioneer is Credit Cards Law and its sub-regulations. This Law and sub-regulations that regulate subjects such as issuing, using and closing credit cards which are actually a payment instrument, yet became a consumer loan type in emerging countries such as Turkey, and which is a loan type easy to obtain and use in respect of consumers, high yield-low risk in respect of banks have disciplined the system dramatically. Before the effects of the crisis are being felt, the general provision ratios for cash and non-cash loans anticipated in the legislation were raised to increase the reserves held for possible loan losses. In crisis period, these regulations were loosened to give banks some room and accordingly the negative effects of the crisis for loan users were tried to be reduced. To contribute to the solvency of real sector companies which became insolvent during the crisis period, regulations were brought to provide temporary facilities for banks to re-structure the loans of these customers. Also to prevent the global crisis to affect negatively the banks balance sheets and to ensure the banks financial structures remain strong, the distribution of dividends of banks were made subject to the BRSA permission since 2008 and it was aimed to strengthen their own funds by leaving the period profits in banks accounts. As the country emerged from the global financial crisis, Turkish banking sector overall look is well above of the most countries in year 2011. As of December 2011, there are 48 banks operating in Turkey with 10.518 branches and 195.292 personnel. Of these 48 banks, 29 of them are deposit banks being 3 public, 10 are private and 16 are foreign banks; 13 are development and investment banks; 4 are participation banks and 2 banks operate under the SDIF. By looking at the ownership structure of Turkish banking sector, deposit accepting state banks have a share of 28.0 %, deposit accepting private banks have a share of 50.7 %, deposit accepting foreign banks have a share of 13.4 %, development and investment banks have a share of 4.5 % and participation banks have a share of 3.4 %. Turkish banks are also very active in the international arena and have 55 subsidiaries, 77 branches and 11 representative offices abroad; including Europe, Balkans, Middle East and Central Asia regions. The total assets of Turkish banking sector reach TL 1.218 billion as of December 2011 and the banking sector compose 78 % of the Turkish financial sector by asset size. The share of total assets of the banking sector within gross domestic product which was 54.8% in 2004 has reached to 96.7% as of December 2011. This ratio which is 200%-500% in developed countries shows the growth potential of the Turkish banking sector. Loans are the most important asset item of the Turkish banking sector. While during the 90 s the most important asset item of most banks were government debt securities because of the high borrowing requirement and thus the banks could not transfer funds to the real 4
sector, the loans granted to real sector have started to increase rapidly since the beginning of 2000s and they have exceeded the amount of securities as of 2005. The share of loans within total assets which reached TL 683 billion as of December 2011 realized as 56.1% of total assets. The share of securities in total assets was decreased to 23.4% in the same period and reached TL 285 billion. By looking at the details of loans, it can be seen that 43.3% of total loans were comprised of corporate/commercial loans, 32.9% were retail loans and 23.8% were SME (small and medium enterprise) loans in December 2011. Asset quality of Turkish banking sector is very high and the non-performing loan ratio was only 2.7% as of December 2011. The securities portfolio of Turkish banking sector was TL 285 billion composing mostly of government securities issued by Turkey as of December 2011. The fact that there were no bonds and bills in securities investments of the sector issued by other countries such as Greece, Portugal and Spain which were in difficulty especially in global crisis period protected Turkish banking sector from primary effects of global crisis which turned into a debt crisis. The fact that borrowing requirement of public sector was decreased as a result of improvement in macroeconomic balances in Turkey has provided banking sector to transfer more resource to real sector, in other words the crowding out effect of public sector decreased. It is seen that Turkish Banking sector is working with deposit weighted funding structure, when liability side is analyzed. The fact that the sector was not relying on foreign funds in global crisis period, helped it to get over the crisis in easier and smooth manner. The share of deposit which was TL 695.5 billion in December 2011 period in total liabilities except own funds realized as 64.9%. The second most important fund resource of the sector is debts abroad. The total funds of Turkish banking sector, which it provides from banks and financial institutions abroad by loan, deposit, syndication, securitization, subordinated debts and repo, was USD 98.2 billion in December 2011. While renewal ratio of syndicated loans was over 100%, Turkish banks have no difficulty in borrowing from international markets. With the resolutions taken in 2010, the authorization was granted for issuing bonds and bills in and outside of the country and thus, it was enabled to provide longer term funds for the banks. Within this scope, the amount of total bond issuance realized in Turkish banking sector was reached to TL 18.4 billion in December 2011. While the own funds of the sector was TL 144.5 billion in December 2011, it corresponded to 11.9% of total liability. By making the dividend distributions of banks subjected to the permission of the BRSA since end-2008 when the global crisis deepened and by leaving the profits in the bank balance sheet, the own funds were strengthened. The 2011 profit of the banking sector which gained serious profits in the environment of decreasing interests stayed behind previous years due to the recession in profit margins, cessation of downwards tendency of interests and competitive pricings. The net period profit of the sector was TL 19.8 billion as of December 2011. The Capital Adequacy Ratio of Turkish banking sector was above the legal limit by 16.5 % as of December 2011 and the target ratio determined in 2006. Although there is a slight downwards trend in the CAR of the sector depending on the increase in loans, all banks continue to operate with a CAR above the legal limit and the target ratio. 5
Turkish banking sector has a strong outlook when it is compared with the other countries banking sectors. Turkish banking sector s Return on Asset ratio is 1.7 % and Return on Equity ratio is 15.5 % which show a higher ratios than most of other countries. Turkish banking sector having gone through two crises in 2000 and 2001 achieved a strong and well capitalized market as a result of the restructuring, consolidation and recovery process in previous years. In this regard, effects of the global crisis on Turkish banking sector remained relatively limited compared to its peers in developed and other developing countries. 6