This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 ANKARA 006026 
 
SIPDIS 
 
STATE FOR EUR/SE AND EB/IFD 
TREASURY FOR INTERNATIONAL AFFAIRS - RADKINS AND MMILLS 
NSC FOR BRYZA AND MCKIBBEN 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EFIN ECON TU
SUBJECT:  Problems with Banking Law Negotiations 
 
REF: ANKARA 5998 
 
This is a joint cable with Congen Istanbul. 
 
¶1. (Sbu) Summary: Despite months of extensive consultation 
with bankers, and an explicit-but now postponed-IMF 
deadline, a new banking law drafted by Turkish regulators is 
considered far too restrictive by both bankers and the IMF. 
Bank regulators and the GOT are working to revise the text, 
but the latest set of proposals from the regulators remains 
unacceptable to the IMF and World Bank.  Setbacks in the 
negotiations could well require an additional IMF-World Bank 
mission in mid-November. End Summary. 
 
Background: 
---------- 
 
¶2. (Sbu) At the beginning of 2004, when the IMF staff and 
the GOT set the structural reform agenda for the year, it 
was agreed that Turkey needed a completely revised banking 
law.  For months the banker's association and its membership 
gave input and bank regulators looked at other countries 
practices on issues such as banning bank owners from also 
owning news media, industrial groups, pension funds, or 
being connected with political parties.  The introduction of 
bans on any of these cross-holdings would have been highly 
disruptive to some of Turkey's largest banks, most of whose 
ownership structures violate at least one of these 
restrictions.  In the end, tightening cross-holding 
requirements were dropped as too restrictive and, according 
to Bank Regulatory and Supervisory Agency (BRSA) Chairman 
Tevfik Bilgin, as not comparable to rules in other OECD 
countries. 
 
¶3. (Sbu) After postponement of a June 30 IMF deadline, a 
draft written by BRSA staff was completed in August.  In 
recent weeks, however, press reports and post contacts have 
made clear that it is unacceptable to the bankers 
association, which has successfully lobbied the IMF to take 
up many of its issues.  Because of the controversy and the 
press of other business, including the 2005 budget, Deputy 
Prime Minister Sener indicated last week that parliament 
will only take up the banking issue in the new year. 
 
Bankers Critical: 
---------------- 
 
¶4. (Sbu) In a series of recent press interviews and 
statements, Turkey's leading bankers, led by Bankers' 
Association Chairman and Disbank CEO Ersin Ozince, have 
strongly criticized the draft law as far too intrusive into 
bankers' actions.  Ozince noted that over-regulation could 
cause the sector to cease functioning.  He attacked a 
provision that would require banks to sell their non-bank 
assets and argued that banks needed to be profitable for the 
sector to be strong. Ozince called for modifications in the 
banking law to be limited to measures necessary for EU 
compliance. 
 
5.(Sbu) In a recent meeting with Istanbul econoff, Bankers 
Association Secretary General Ekrem Keskin elaborated on 
bankers' concerns.  In the association's view, the new law's 
provisions penalize entrepreneurship and risk-taking and are 
not well adapted to Turkish conditions.  As both Keskin and 
the head of one leading international bank in Turkey told 
us, the draft is too punitive.  In the latter's view, it is 
based on the belief that if Turkey had "imprisoned bank 
owners" before 2001, it could have avoided that year's 
banking crisis.  As a result, it makes no distinction 
between bank losses caused by macroeconomic conditions and 
those resulting from "bad faith."  In addition, in a 
revealing lack of faith in Turkey's regulators, the act 
spells out in extraordinary detail the responsibilities of 
the BRSA, essentially transferring regulatory power from 
that organization to the parliament, and in the 
association's view turning the board itself into an audit 
and inspection agency.   An added complication is the 
continuing struggle for authority over the sector between 
the recently separated BRSA and Savings Deposit Insurance 
Fund (SDIF).  The latter hopes to retain a role in banking 
supervision, and it and the Banking Board continue to argue 
over who should set premium levels for deposit insurance. 
More generally, Keskin noted that Turkish banking law has 
been modified a number of times in recent years, and already 
is "85 percent" compatible with EU standards.  The constant 
changes create a climate of uncertainty that inhibit the 
sector. 
¶6. (SBU) The association criticized the draft law's 
excessive capital adequacy requirements, overly strict 
limits on bank's non-financial participations, and an 
"unworkable" requirement that each bank board have two 
"independent" members with added authority.  The latter 
provision, in particular, is difficult for banks to 
implement, in Keskin's view, and he suggested it may be a 
way for the Turkish government to give its supporters a 
larger role in the financial sector.  Bankers also worry 
that the law will make it harder for Turkish banks to meet 
the Basle-II capital adequacy requirements. 
¶7. (Sbu) Ergun Okur, Executive Vice President of Oyak Group 
and a board member of Oyak Bank, told econoffs no one could 
do banking with the law as drafted.  Another prominent 
banker added that the draft law would likely fail in its 
goal of preventing a repeat of past problems in the sector, 
for while it would likely cause good capital and management 
to leave the sector: "daring people would stay." 
 
IMF Staff Sides with Banks: 
-------------------------- 
8.(Sbu)  The IMF Resrep told econoffs that IMF banking 
experts, after a closer look at the text, were sympathetic 
to the concerns raised by bankers.  (Keskin noted that after 
the IMF's initial clearance of the text, the association had 
a full-day meeting with the fund to lay out its concerns.) 
The Resrep said the Central Bank also had concerns that the 
law as drafted impinged on its ability to conduct monetary 
policy, by specifying circumstances under which the Central 
Bank would be required to provide liquidity to banks.  The 
IMF objected to the draft law not taking into account the 
findings of the commission of inquiry on the Imar Bank 
collapse.  Specifically, the commission and other observers 
had cited the sworn bank auditors' monopoly of bank 
inspections as overly restrictive in terms of the expertise 
that could be brought to bear.  On the other hand, the BRSA 
Vice President in charge of on-site inspection (sworn 
auditors), Mustafa Korhan, told econoffs that the sworn bank 
auditors support allowing information technology experts to 
join in on-site inspections, in the interest of avoiding 
another Imar Bank-like case. 
 
¶9. (Sbu) The Resrep confirmed that the draft would set 
capital requirements above EU standards-an unnecessarily 
onerous requirement at a time when banks are slowly 
rebuilding their capital from the effects of the 2001 
crisis.  The law would also mandate regular ratings by 
rating agencies-an unnecessary cost in the view of both 
bankers and the IMF.  The law would force banks to finance a 
training center for bankers, and includes a provision 
granting State-owned banks the same seniority in debt 
workouts currently enjoyed by the deposit insurance agency, 
the SDIF.  The latter provision seems inconsistent with the 
IFI-mandated state bank privatization strategy.  Both 
bankers and the IMF objected to a provision that would 
weaken bankers' rights in workouts, by making an arbitral 
body's decisions binding only on the banks rather than on 
debtors as well. Finally, the IMF objected to retention of a 
loophole on connected lending. 
 
Unexpected BRSA Proposal Stops Progress: 
--------------------------------------- 
¶11. (Sbu) Though the IMF Deputy Resrep told econoff last 
week that Fund staff were encouraged by a newly-agreed 
negotiating process that would allow the GOT to take over 
the process-albeit with continued BRSA involvement-in an 
October 20 meeting, a World Bank banking expert told 
econoffs the whole process has been stopped by the latest 
BRSA draft. He said the latest draft included the proposal 
that the bankers association would take over management of 
deposit insurance.  Aside from the conflict of interest 
problem, he pointed out the association had no experience 
with this role.  Worse, the World Bank expert said SDIF 
officials with whom he spoke had no prior knowledge of 
BRSA's proposal to take away one of SDIF's core functions. 
 
¶12. (Sbu) The World Bank official said IMF Mission Chief 
Moghadam forcefully rejected the new draft, and went over 
BRSA Chairman Bilgin's head to seek-and later 
obtain-Minister Babacan's agreement to go back to 
negotiating on the basis of the August draft.  The World 
Bank official said this latest development meant the IMF and 
World Bank banking law experts would return in two weeks and 
that negotiations over a new Standby would have to be 
further delayed. 
 
¶13. (Sbu) Even if a new draft can be worked out with the IMF 
and World Bank, it would still have to be approved by the 
Council of Ministers before the World Bank's condition under 
its PFPSAL3 loan facility would be met.  For this reason the 
World Bank official doubted the second tranche of this 
facility would go to the bank board before January or 
February. 
 
Comment and Conclusion: 
---------------------- 
¶14. (Sbu) The group of current and former sworn bank 
auditors-led by BRSA President Bilgin-have a reputation as a 
tight-knit cadre with a tendency to distrust outsiders, 
especially bankers.  It seems they got carried away in 
drafting the new banking law.  Bilgin's proposal-from out of 
left field-for the bankers association to take over deposit 
insurance demonstrates poor judgment but also points to 
serious problems between BRSA and SDIF.