“Turkish Banking Crisis 2001”

R. ENGIN R. ENGIN AKAKÇÇAKOCA AKOCA MARCH 2012 MARCH 2012

LONDONLONDON0

The The CrisCrisiiss

Sharp Sharp increaseincrease

in in interest interest ratesrates

Sharp Sharp depreciationdepreciation

of of thetheTurkish Turkish LiraLira

ContractionContraction

in economic in economic activityactivity

Political InstabilityPolitical Instability

Maturity Maturity mismatchmismatcheses

funding funding losseslosses..

ShortShort

FX FX positionspositions

FX FX losseslosses

Asset QualityAsset Quality

NPLsNPLs

Credit RiskCredit Risk

Lending ApetiteLending Apetite

Funding From Abroad Funding From Abroad liquidity shortagesliquidity shortages

Ineffective Interbank Market Ineffective Interbank Market crippled settlementscrippled settlements

LEADING TOLEADING TO

Shocks Impact on theBanking Sector

1

Eroding.......................Eroding.......................

CAPITAL BASE CAPITAL BASE

DryDrying up................... LIQUIDITYing up................... LIQUIDITY

Loss of Confidence.....RUN ON BANKSLoss of Confidence.....RUN ON BANKS

Signalling..Signalling....................

..................

MORE BANK FAILURES MORE BANK FAILURES

Further Shaking..........POLITICAL PLATFORMFurther Shaking..........POLITICAL PLATFORM

Collapse of.................. ECONOMYCollapse of.................. ECONOMY

∴∴CRISIS is SYSTEMIC and CRISIS is SYSTEMIC and EXPENSIVEEXPENSIVE

2

First Wave

–

December  1999 

settlement  & clearing issues; 

rumors;   5 banks intervened 

First Wave

–

December  1999 

settlement  & clearing issues; 

rumors;   5 banks intervened 

TURKISH BANKING CRISIS 2001 TURKISH BANKING CRISIS 2001

Second  Wave

–

December 2000 

Liquidity & Interest Rate Crisis    

1 bank intervened   

BRSA: Banking Regulation and Supervision Agency

SDIF   : Savings Deposit Insurance Fund  

BANK RESTRUCTURING

PROGRAM

BANK RESTRUCTURING

PROGRAM

3

October 27, 20002 banks intervened 

Banks 

owed 

16 

bio 

USD 

to 

Foreign 

Creditors. 

Threats 

of 

activating 

cross‐default 

and 

force–

major 

clauses 

in 

loan 

agreements.

Third Wave –

January / February 

2001 FX Rate and Liquidity Crisis 

2 Banks intervened 

State owned banks will be restructured

State owned banks will be restructured

Problem Banks will be floated within SDIF.

Problem Banks will be floated within SDIF.

Banks will be RecapitalizedBanks will be Recapitalized

Regulatory and Supervisory

Framework will be strengthened

Regulatory and Supervisory

Framework will be strengthened

BANK RESTRUCTURING PROGRAM

4

A.A.

RESTRUCTURING OF STATE OWNED BANKSRESTRUCTURING OF STATE OWNED BANKS

1.1.

FINANCIAL CONDITIONFINANCIAL CONDITION

Accumulated Duty Losses Accumulated Duty Losses ::

26 billion $26 billion $

O/N BorrowingsO/N Borrowings

: : 14 billion $14 billion $

Deposit Interest Rates Deposit Interest Rates > > Market Rates.Market Rates.

∴∴

Capital Increase Capital Increase ::

4 billion $4 billion $

Proper asset classification. (NPLs:1 billion $ Proper asset classification. (NPLs:1 billion $ ►► 3.5 3.5 billion $; LLPs : 250 million $ billion $; LLPs : 250 million $ ►► 2.7 billion $)2.7 billion $)

Back to Profitability. (Back to Profitability. (--896 million $ 896 million $ ►▲►▲ --37 million $ 37 million $ in 8 months and in 8 months and ►▲►▲+1.172 billion $ in 20 months)+1.172 billion $ in 20 months)

5

A.A.

RESTRUCTURING OF STATE OWNED BANKSRESTRUCTURING OF STATE OWNED BANKS

2.2.

OPERATIONAL AND LEGALOPERATIONAL AND LEGAL

Joint Board for synergy and cost cutting.Joint Board for synergy and cost cutting.

Reorganization (Distribution Channels, Operations, Reorganization (Distribution Channels, Operations, Marketing/Sales, Internal Control and Risk Management).Marketing/Sales, Internal Control and Risk Management).

AdvisorsAdvisors--Experts appointed for operations reExperts appointed for operations re--engineering.engineering.

Intensive Public relations.Intensive Public relations.

Laws Amended: State Personnel, Bankruptcy, Early Retirement, Laws Amended: State Personnel, Bankruptcy, Early Retirement, Authorization to Restructure Loans etc.Authorization to Restructure Loans etc.

6

B.B.

PROBLEM PROBLEM PRIVATE PRIVATE BANKS TO BE TAKEN BANKS TO BE TAKEN OVER BY THE SDIF, OTHERWISE...OVER BY THE SDIF, OTHERWISE...

SDIF would need 14 bio USD cash instead of GBonds. Treasury would need to borrow more.More pressure on interest rates. Unsustainable domestic debt dynamics. Run from banks. Domino effect. Deposits getting out of the banking system.No more foreign credits for a considerable period of time.

(Cooled off external pressures.)No more active payment system.

WHAT COSTS MORE THAN “A LOSS OF

CONFIDENCE IN BANKS”

? 7

Therefore : Therefore :

SellingSelling

the banks the banks individually or after merging them to individually or after merging them to

optimum sizes optimum sizes as soon as possibleas soon as possible, or, or

SubjectingSubjecting

them to them to immediate immediate P&AP&As, ands, and

Liquidating the rest Liquidating the rest

Were the options preferred. Were the options preferred.

8

Resolution of Banks Transferred to SDIF Resolution of Banks Transferred to SDIF Name of Bank Name of Bank Strategy Strategy Resolution (Months)Resolution (Months)

A 13

B 13

C Merger with Good Bank Q. 13

D 3

E -

F 29

G 18

H 9

I Merger with Bad Bank N. 6

J 14

K 14

L 14

M Merger with a State Owned Bank 29

N Bad Bank -

O 30

P 10

Q Direct Sale 20

R 6

S 16

T Liquidation through bankruptcy -

U Voluntary liquidation -

Source : SDIF, BRSA. Compiled from BSRP reports * : Do not have “misuse” of Bank resources.

9

C.C.

RESTRUCTURING OF PRIVATE BANKSRESTRUCTURING OF PRIVATE BANKS

Debt swap operation

($7.5 billion against LCY GBonds)($7.5 billion against LCY GBonds)

Recapitalization Program Recapitalization Program

Three Stage Audit (CAR Three Stage Audit (CAR ≥≥

8 %)8 %)

Government to capitalize systemic bank (TA Government to capitalize systemic bank (TA ≥≥

1% of 1% of

market) up to 5 % CAR (Tier 1), if owner pays in at least 50 % market) up to 5 % CAR (Tier 1), if owner pays in at least 50 % of what is required. of what is required.

Government to provide subGovernment to provide sub--loan for the rest up to CAR = 9%.loan for the rest up to CAR = 9%.

Ensured transparency and confidence in banking system.Ensured transparency and confidence in banking system.

Restored market discipline.Restored market discipline.

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D.D.

IMPROVING THE REGULATORY AND IMPROVING THE REGULATORY AND SUPERVISORY FRAMEWORKSUPERVISORY FRAMEWORK

Moving Moving towards international standardstowards international standards, introduced new and revised , introduced new and revised regulations onregulations on;;

Capital Adequacy.Capital Adequacy.Risk management.Risk management.Lending limits and loan loss provisioning.Lending limits and loan loss provisioning.Related party exposure.Related party exposure.Accounting standards and independent auditing.Accounting standards and independent auditing.Facilitating mergers and acquisitions. Facilitating mergers and acquisitions.

Aiming at introducing Aiming at introducing risk based supervision risk based supervision and tighter and tighter prudential prudential supervision.supervision.

And signed MoUs with other countriesAnd signed MoUs with other countries’’

supervisory supervisory

authorities to improve crossauthorities to improve cross--border supervision.border supervision.

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Results of Results of Restructuring Restructuring EffortsEfforts

Consolidation in the banking sector Consolidation in the banking sector

Decline Decline in the share of the State and the SDIF banksin the share of the State and the SDIF banks

Reduction of financial risks to manReduction of financial risks to manaagable levelsgable levels

Improved transparencyImproved transparency

Improved profitabilityImproved profitability

Strengthened capital structureStrengthened capital structure

Increased credit Increased credit extensionextension

Increased foreign fundingIncreased foreign funding

12

Improvements in capital structureImprovements in capital structure

Capital Base Of Total Assets

Billion USD (%)

2001 1,4 1.2

2002 5,7 4.4

2003 13,0 7.2

2004 19,2 8.4

2005 20,0 13.3

2006 41,2 12.0

2007 63,0 13.1

2008 54,4 11.8

2011 80,6 11.8

Source: BRSA, Source: BRSA, www.bddk.org.trwww.bddk.org.tr

BAT, (Banks Association of Turkey) BAT, (Banks Association of Turkey) www.tbb.org.trwww.tbb.org.tr13

Funding From Foreign Banks Funding From Foreign Banks (billion USD)(billion USD)

14

Loans Loans (billion USD)(billion USD)

15

HOW ABOUT HOW ABOUT UKRAINESUKRAINES’’s CRISIS OF 2008......s CRISIS OF 2008......

16

In addition to similarities with the Turkish Crisis ...In addition to similarities with the Turkish Crisis ...

Effects of the Global Financial Turmoil. Effects of the Global Financial Turmoil.

Resulted in...Resulted in...

FX liquidity shortage; Devaluation; Increasing NPLsFX liquidity shortage; Devaluation; Increasing NPLs

and Solvency problems in banks . and Solvency problems in banks .

But wait ...But wait ...17

Credit Growth from 2004 to 2008Credit Growth from 2004 to 2008 % %

18

Source : EBRD

Loans / Deposits (%)Loans / Deposits (%)

19

And inevitably ......And inevitably ......

Outstanding Consumer Loans Outstanding Consumer Loans

20

Exchange

Rate

and

Source : Reuters Source : NBU 

21

And...Private Sector Credit to GDP

Source: NBU

So...So... Ukrainian Banks Capital 2006Ukrainian Banks Capital 2006--20112011

22

Although...Although...

Since October 2008, the NBU has intervened in problem Since October 2008, the NBU has intervened in problem banks, resulting in appointing provisional administrators banks, resulting in appointing provisional administrators for 27 banks, liquidation of 19 banks, change in private for 27 banks, liquidation of 19 banks, change in private ownership in 4 banks (including one of the largest ownership in 4 banks (including one of the largest banks), and nationalization of 3 systemic banks... banks), and nationalization of 3 systemic banks...

23

Ukraine could not consolidate the system Ukraine could not consolidate the system

24

TodayToday’’s Most Important Problem...s Most Important Problem... Total Loans (in billion LCY)Total Loans (in billion LCY)

25

Micro steps to be taken...Micro steps to be taken...

Development of an efficient UAH market.Development of an efficient UAH market.

Only healthy banks to be permitted to exist.Only healthy banks to be permitted to exist.

Improve legislation and practices related to;Improve legislation and practices related to;

oo protection of creditorsprotection of creditors’’

rights, rights,

oo enforcement of collateral,enforcement of collateral,

oo simplfying and shortening the judicial and simplfying and shortening the judicial and enforcement procedures. enforcement procedures.

26

Recommendations Recommendations based on Lessons Learned based on Lessons Learned

I.I. Preventive Preventive MeasuresMeasures::

Make sure you have clear, strong, healthy rules Make sure you have clear, strong, healthy rules for licencing. for licencing.

Make sure your Make sure your onon--site inspections site inspections include include financial financial investigative investigative techniques.techniques.

““Take out Take out the Bad the Bad Apples from Apples from the Basketthe Basket””27

Recommendations Recommendations based on Lessons Learned based on Lessons Learned

II.II.

Crisis Crisis Management LessonsManagement Lessons::

You may have to introduce You may have to introduce blanket guarantee. blanket guarantee.

Announce Announce the the rulesrules

and conditions.and conditions.

Coordinate with Coordinate with other Public Authorities.other Public Authorities.Prepare an Prepare an ““Emergency Action PlanEmergency Action Plan””. . Make sure Make sure ““Lender of Lender of Last ResortLast Resort””

facility functionsfacility functions..

Provide information to public.Provide information to public.

““Keep Your Settlement System IntactKeep Your Settlement System Intact””

28

Recommendations Recommendations based on Lessons Learned based on Lessons Learned

III.III.Resolution Resolution of intervened banksof intervened banks::

““Merge Merge and then and then resolveresolve””

strategy. strategy.

Immediately Immediately start cost cuttingstart cost cutting..

Do P&As. Do P&As.

If the bank If the bank cannot cannot be sold in be sold in a short period of a short period of time, then time, then start start selling the B/S in selling the B/S in pieces. pieces.

Closing Closing branches and laying branches and laying ––

off personnel. off personnel.

Do it on time. Do it on time.

““If there is a need to act fastIf there is a need to act fast……then act fastthen act fast””29

Recommendations Recommendations based on Lessons Learned based on Lessons Learned

IVIV. . Consolidate Further:Consolidate Further:

Develop legislative framework for Develop legislative framework for mergers and mergers and acquisitions. acquisitions. Encourage M&As by giving incentives. Encourage M&As by giving incentives.

CCorporate debt restructuring. orporate debt restructuring. Develop principles / guidelines and the legislative framework. Develop principles / guidelines and the legislative framework.

Have standHave stand--still rules for justified cases. still rules for justified cases.

““Reward the Effort Without Reward the Effort Without ForbearanceForbearance””

30

IN SHORT IN SHORT

Prompt exit of nonPrompt exit of non--viable banks viable banks from the system from the system is a must.is a must.

Design a recap strategy for the rest.Design a recap strategy for the rest.••

Make sure ownersMake sure owners

are are written down for the losseswritten down for the losses..

Make sure assets are disposed of a.s.a.p.Make sure assets are disposed of a.s.a.p.Wealth will be changing hands. Protect yourselves.Wealth will be changing hands. Protect yourselves.

There may not be an environment for proper asset There may not be an environment for proper asset eevaluation.valuation.Be flexible; use more than one evaluator.Be flexible; use more than one evaluator.

For the banks which will need Public Funds; For the banks which will need Public Funds; decidedecide

on eligibility on eligibility

& exit criteria.& exit criteria.

31