Recently Turkey’s banking watchdog (BRSA) made a decision that means paving the way for bank owners and top managers to lend to businesses that belong to them. This type of transactions has been under a ban since 2001, the year Turkish financial institutions collapsed. The rest of the story comes from Wall Street Journal.
The BRSA decision was issued after a Kuwaiti-backed Turkish bank, Kuveyt Turk, made a loan to Dicle Enerji Yatirim, an energy investment firm. Businessman Abdullah Tivnikli controls more than 30% of Dicle Enerji through holding companies and is also deputy chairman of Kuveyt Turk. The BRSA said that relationship didn’t breach regulations because Mr. Tivnikli holds his stake in Dicle Enerjii indirectly.
What has BRSA done is simply rule bending, because it is “nakedly” banned for stakeholders to extent credit to their own firm. However BRSA’s decision is up to characteristics of partnership and it let “indirect” shareholders to do so. Although now and 2001 period are not the same, it is the restrictions that have kept the system strong till now.
The Historic Background
An enlightenment is needed to understand why the credit restrictions took effect. Over the 90s, there had been a large number of banks involved in tunneling bank deposits to shareholders through connected lending. This process was generally related to personal benefits politicians reaped from the banking sector. The politicized implementation of banking regulations could benefit from connected lending and allowing defunct banks to continue operating. Furthermore, the granting of banking licences was a beneficial business, and many were granted to bankers without the proper credentials. A blanket deposit guarantee, in place since the 1994 crisis, helped a lot of the banks to survive, allowing them to bid up deposit rates, and killing incentives for depositors to be selective.
As you understand, the process has nothing to do with technically risk management or conceptually business ethics.
At that time, what the banks do in fact was not banking. Retail banking emerged following the 2001’s meltdown as common theme in financial services industry. Before that, banking had been all about investing in government paper, but some small banks were primarily concentrated in financing the owners’ business. These transactions were the triggers of the crisis.
Time will show if the latest decision is a signal of turning the clock back. Tightened regulations let Turkey to be one of the best performing economies through late-2000s financial crisis with a fast recovery. In other words, they are what Turkish banks are kept safe by. Keeping an eye on relevant developments is an absolute must.
Hopefully I will write about unsatisfactory financial results of Turkish banks in next posts.