raina turkey

Turkey Banking Crisis: 

Turkey Banking Crisis Lalit Raina Global Finance Forum June 19 – June 21, 2002

Turkey Banking Crisis: 

Turkey Banking Crisis Pre-crisis Environment and Recent Developments Bank Role until now Lessons Learnt Bank Role in Future

Pre-crisis Early Indicators: 

Macroeconomic and Political Risks High Chronic Inflation—nearly 70% in 1998 and 1999, 39% in 2000, 69% in 2001 High and very volatile Nominal (Nearly 100%) and Real Interest Rates—nearly 30% or More Falling and Unpredictable Exchange Rates High and Growing Overall Fiscal Deficit, 15% of GNP in 1998, 24% in 1999, 20% in 2000, 17% in 2001 Pre-crisis Early Indicators

Pre-crisis Early Indicators: 

Macroeconomic and Political Risks (Contd.) Large and Growing Public Debt --57% of GDP in 2000, 91% in 2001 Uncertain Economic Growth, -6.4% in 1999, 6.3% in 2000, --8.5% in 2001 Lack of clear economic strategy Lack of political will and Consensus to undertake serious reforms Fragmented Political Coalitions leading to a loss of Public Confidence in the Government Pre-crisis Early Indicators

Pre-crisis Early Indicators: 

Regulatory and Institutional Framework Fragmented Banking Regulation and Supervision Authority—Lack of Focus, Coordination and Responsibility Lack of Independence ---Political Interference Outdated and Overly Lenient Prudential Regulations Enforcement very weak, Widespread Regulatory Forbearance Deficient Accounting and Auditing Practices, Poor Public Disclosure Pre-crisis Early Indicators

Pre-crisis Early Indicators: 

Private Banks – pre-reform situation High Forex Exposure High Interest Rate Exposure High level of NPLs High Connected Lending Poor Capital Adequacy A number of insolvent banks in the system Pre-crisis Early Indicators

Pre-crisis Early Indicators: 

State Banks – pre-reform situation Politically directed subsidized lending in Ziraat and Halk Huge losses (duty losses nearly $21Billion) hidden in the balance sheet as government dues Insolvent Housing bank – Emlak Excessive number of branches in Ziraat and Halk Excessive staff in both State Banks Pre-crisis Early Indicators

Recent Developments: 

Regulatory and Institutional Framework A new Banking Law was adopted creating an Independent Banking Regulation and Supervision Entity (BRSA), and Strengthening Bank Failure Resolution Provisions. Prudential Regulations were Upgraded to EU/BIS Standards Enforcement of New Regulatory Standards was Strengthened. Banking Discipline was Restored through Broad SDIF Interventions in Insolvent Banks. Recent Developments

Recent Developments: 

Private Banks – present situation Net forex exposure reduced to prudent levels; Short-term liabilities reduced; Detailed portfolio audits carried out to reflect NPLs more accurately; Connected lending exposure reduced and is being tightly monitored; 20 insolvent private banks have been intervened and taken over. Recent Developments

Recent Developments: 

State Banks – present situation Ziraat and Halk duty losses eliminated, balance sheet restructured, Short term liabilities reduced; EMLAK bank closed down; Independent Joint Governance Board Created for Ziraat and Halk; Excess branches (nearly 900) of Ziraat and Halk closed down; Excess staff reduced to the tune of nearly 16,000 either retired or transferred to other public entities Recent Developments

Slide11: 

Bank Role Until Now

Slide12: 

Crisis Prevention Measures Create strong and politically independent financial management institutions like Central Bank, Banking Regulation and Supervision authority. Develop early warning systems based on crisis indicators. Contingency planning, including what-if scenarios, should be in place before crisis actually happens. Under macroeconomic stress situations the level of capital required should be increased. Lessons Learnt

Slide13: 

Crisis Prevention Measures (cont.) Risk management regulations should be enforced to assess individual bank exposures and capital requirements. Consolidated supervision both vertical and horizontal should be used to assess financial risks on a group basis Deposit Insurance premiums to be increased in times of high macro- and sectoral risks Lessons Learnt (continued)

Slide14: 

Crisis Prevention Measures (cont.) Fit and proper ownership/ management assessment should be made to weed out incompetent/dishonest bank owners Accounting/Auditing Standards and Practices Should be Rigorously Enforced to Ensure Disclosure of Reliable Financial Information Insolvency and creditor rights legislation should be strengthened for efficient restructuring of corporate debtors Lessons Learnt (continued)

Slide15: 

Crisis Management Measures In times of crisis, an economic crisis management team should be urgently formed between the relevant institutions to ensure coordinated rapid response. In case of a liquidity distress the Central Bank liquidity should be provided early and quickly to avoid a systemic contagion effect. Urgent intervention should be undertaken to stop further bleeding in loss making banks. Lessons Learnt (continued)

Slide16: 

Crisis Management Measures (cont.) Institutional capacity including financial, human and technical resources should be mobilized to deal with the crisis. Prompt restructuring of the banking sector should be initiated to restore confidence in the banking system. Bad banks should be removed urgently from the system to reduce subsequent overall resolution costs Lessons Learnt (continued)

Slide17: 

Bank Role in Future