Turkish banks could be facing new delay in adopting Basel II

ANKARA – The global lending squeeze and a local economic downturn could give Turkish banks a further reprieve from adopting tougher international rules on credit risk and capital adequacy. The Basel II rules have long been seen by the government, foreign investors and international institutions as the next major step in raising standards in Turkey’s financial sector, whose loose regulation helped to trigger a deep financial crisis in 2001. However, bankers say they expect Turkey’s BDDK banking watchdog, which has already deferred the changes to early 2009, to extend the delay on the grounds that the economy is in a downturn and banks are already under pressure from tight global money markets. The BDDK declined to comment. The stricter Basel rules could increase banks’ lending costs and tip the economy into contraction because many small firms operating in the black economy will find it more difficult to get bank loans. Launching the new rules might also become more difficult once a current $10 billion International Monetary Fund loan deal expires in May. The fund’s supervisory role has been crucial in helping Turkey’s banks recover from the 2001 crisis. Commerce law A new commerce law, which envisages credit ratings for companies taking out loans, has yet to be passed. Creating rating agencies that banks can trust will take time and can be costly, bankers say. In addition, Turkish markets have been undermined by a prosecutor’s bid to shut down the ruling Justice and Development Party (AKP) for alleged Islamist activities, a major source of uncertainty in a country with a history of banning political parties. «The plan for Basel II is 2009 but I do not think they will apply it. The commerce law has not been passed and we need a credit rating system for firms. We have a local election next year and political tensions are obvious,» said Oyak Investment banking analyst Alpay Dinckoc. Stronger than 2001 Concerns about a further delay on Basel II may be muted by the strong recovery Turkish banks have made from the 2001 crisis. Turkey has no US-style market for high-risk mortgages and its banks have so far not been directly affected by the US crisis. Finance Minister Kemal Unakitan said recently the Turkish banking sector was the strongest it had ever been, and very liquid. There is much more foreign involvement than in 2001, with international banks including HSBC, Dutch financial services group ING Groep NV, Citigroup and Belgian-Dutch financial group Fortis NV operating in Turkey directly. Data from watchdog BDDK show Turkish banks’ total deposits and funds jumped to 406.41 billion lira in April from 252.53 billion lira at the end of 2005. «In 2001, there was a very large uncovered foreign exchange position. My understanding is that that is not the case currently. There is more foreign involvement and this might mean there is more support for the Turkish banking sector,» said American Express economist Sarah Hewin. However, a further delay in tightening banking rules would pose risks. Slowing economic growth, higher market interest rates and renewing syndicated loans from abroad could make life tougher for Turkish banks in coming months, analysts said. «Foreign banks may lower their loan limits for emerging market countries and the cost of borrowing may rise. Things will depend on how European banks will be impacted by the global turmoil,» said Fortis Bank chief economist Haluk Burumcekci. Earlier this month, rating agency Standard & Poor’s revised its outlook on Turkey’s credit rating to negative from stable due to a deteriorating macroeconomic environment, and bankers say this could raise the cost of borrowing from abroad. The share of loans received from abroad is now 11 percent of banks’ liabilities versus 8 percent in previous years, leaving them more vulnerable to shifts in global financial markets. The exposure of big European and US banks to the credit crisis could hurt their Turkish operations too, analysts said. «During this credit crisis, there may be some vulnerability in the parent companies themselves. They may come under pressure from the credit crunch and therefore be less able to support their Turkish partners,» Hewin said. The banks have strong balance sheets but a sharp depreciation in the lira would hit private sector firms and in turn affect the banks. Lower lending rates abroad and a firming lira have encouraged Turkish firms to seek foreign loans and, at the end of last year, private sector foreign debt amounted to $158 billion.

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