03 Apr

Recently one of the world renowned leading credit rating institutions has stated that Turkish banking industry has the necessary liquidity capacity to pay back the short term debts. According to the report issued by the credit rating institution the quality of the credit portfolios currently hold by the Turkish banks will provide enough resilience with regard to the market pressures if they arise. The assessment boils down to the point that Turkish banking industry has resilience vis-à-vis moderate volatilities.

The General Perception

Such an outlook might be surprising for many commentators who had already given their verdicts in advance that the year 2014 will be a crunchy period for the Turkish banking industry. Some had even furthered the concerns to a level of an unmitigated disaster. There are some indicators that mistakenly fuel such concerns. It is well know that Turkey has to strike a delicate balance between its exports and its imports. In order to do so it has to reduce its current account deficit which currently amounts to USD$ 60 billion annually and has mainly been contributed by energy purchases and personal spending. Turkey has recently been doing its best to cut down its energy imports and to restructure its energy industry along the lines of renewable production.

However a significant cut down of energy imports, which mainly depends on the transformation of the sector more towards the renewable production, will not be realized in short term. This is why cutting down the personal spending related with import goods is the strategy adopted by the authorities to deal with current account deficit in the short term. To put things in a perspective it should be noted that personal spending fuelled by the availability of cheap consumer loans, had crippled the national savings which had hit the rock bottom to be registered as 12% of the GDP, in other words the historical nadir of the Republican period. The recent legislation, which aimed at reigning in the personal spending, has restricted the number of installments for mobile phones, that has been seen as one of the most important import items contributing in to the current account deficit, in to one. It reduced down the number of installments from 48 to 24 for the automobile purchases.

Such measures inevitably caused alarm for the banking industry which has been providing the necessary funds for such personal spending items in the form of consumer credits. To see such positive comments from reputable credit rating institutions on top of these concerns might be perplexing for some. However once the fundamentals are taken in to account it is easy to see why there is no need for a serious concern and why the Turkish banking industry is still resilient.

Fundamentals

The reason why Turkish banking industry stays strong is its well regulated nature. Following the 2001 economic crisis in Turkey, the industry has been regulated to prove resilient enough to cope with market fluctuations. Turkish banking industry already has overwhelmingly meets the standards adopted by Basel II regulation and has taken a headway to meet the criteria proposed by Basel III in a period where some members of the European banking industry still struggles to comply with. The critical issue of capital adequacy ratio was regulated through the Capital Adequacy Regulation which had later been re-regulated along the Basel II lines to ensure compliance. Data complied in 2013 cite the capital adequacy of the Turkish banks as 17.4% which is already above the level stated in Basel II regulation. The regulations concerning the capital adequacy ratio has already been buttressed by the introduction of better internal auditing and controlling standards for the Turkish banks through the regulations following the 2001 crisis. It is important to note down to stress the health of the Turkish banking industry that 2008 economic slump had left the banking industries of many advanced economies with little chose but to ask for public financial assistance. However Turkish banking sector has emerged out of the 2008 global economic crisis as the only banking industry of an OECD member state that did not ask for any public financial funds to recover.

Conclusion

Given the high level of compliance with Basel II regulations and serious efforts for compliance with the Basel III, Turkish banking industry should not be seen as a fragile one that is vulnerable to day to day market or regulation based changes. Especially its capital adequacy ratio and more importantly its past experiences during the 2001 economic crisis in Turkey in terms of lending practices had created one of the most resilient banking sectors in Europe.


Herdem Law Firm, Istanbul Turkey

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