Turkey Saving Deposit Insurance Fund Bank Recapitalization (2000–2001)

The Banking Regulation and Supervision Agency (BRSA) announced the recapitalization program on November 16, 2000 (IMF 2000a). A December 18, 2000 IMF Letter of Intent (LoI) further described the program (IMF 2000a). The capital injection to Saving Deposit Insurance Fund (SDIF) banks was part of two programs designed to recapitalize SDIF-controlled, one for private banks and one for state-owned banks (Dufour and Orhangazi 2009). The SDIF recapitalized eligible banks on December 7, 2000 (IMF 2000a). In the December 18, 2000, LoI, the government also announced the creation of a dedicated Asset Management Unit, in charge of recovering the value of the assets of banks taken over by the SDIF (IMF 2000a). Both injection programs had the goal of calming capital markets, though overnight rates again deteriorated in February in response to a political crisis (Ozatay and Sak 2002).

On December 6, 2000, the BRSA and the government announced a temporary, full guarantee of depositors and “other creditors (except deposits by owners, deposits in connection with criminal activities, subordinated debt, and shareholder equity)” (IMF 2000a). The guarantee covered domestic deposit-taking banks, and the SDIF administered the guarantee in accordance with Bank Act No. 4389 passed in June 1999 (IMF 2000a).

The Turkish Parliament passed Bank Act No. 4389 on June 18, 1999, which detailed the SDIF’s and BRSA’s authority (Turkey 1999). The Bank Act established the BRSA, an entity independent of the Central Bank of Turkey and the Treasury, which became fully operational as of August 2000 (IMF 2000a). Article 14 of the Bank Act endowed the BRSA with the right to dismiss management, appoint new board members, require provisions up to 100% of deposits, liquidate assets, divest fixed or long-term assets, and take over shares of controlled banks (Turkey 1999, Article 14). Article 15 of the act specified the duties of the SDIF. In general, the SDIF had authorization to liquidate, merge, and acquire assets of banks for which it had “management and control and privileges of shareholders except dividends” (Turkey 1999, Article 14, Section 5[a]). The SDIF had three primary means by which it could execute this authority.

First, the SDIF could transfer the assets, organization, personnel, and insured deposits of a controlled bank to a bank that carried out banking operations for the BRSA (Turkey 1999, Article 14, Section 5[aa]). As of September 7, 2001, Bayindirbank served this function (Saving Deposit Insurance Fund 2004). Second, the SDIF could take over losses not exceeding the value of insured deposits on the condition of owning all of the bank’s equity (Turkey 1999, Article 14, Section 5[ab]). Third, it could take over shares of the bank through payment of the share price to shareholders, as determined “by deducting the loss from paid-up capital” (Turkey 1999, Article 14, Section 5[ac]).

The SDIF was able to “borrow [government securities] in extraordinary situations” from the Treasury (Turkey 1999, Article 15). Provisional Article 4 of the Bank Act authorized the BRSA to determine “principles and procedures” for the sale and transfer of banks shares owned by the SDIF (Turkey 1999, Provisional Article 4).

The BRSA announced the bank recapitalization program on November 16, 2000 (IMF 2000a). A December 18, 2000, IMF Letter of Intent described the program (IMF 2000a).

Article 14 of Bank Act No. 4389 specified that a BRSA “decision related to the revocation of license for performing banking activities and accepting deposits, or to transfer shares of a bank to the Fund, or to transfer rights of shareholders except dividends and management and control shall be published in the Official Gazette” (Turkey 1999, Article 14).

The BRSA and the SDIF administered the capital injection (IMF 2000a). Specifically, the SDIF became, as per the 1999 Bank Act, a legal entity controlled by the BRSA (IMF 2000a). The Bank Act created an Asset Management Unit to recover the value of the assets of banks taken over by the SDIF (IMF 2000a). The BRSA monitored bank balance sheets and income reports to determine insolvency (IMF 2000a). As of September 2000, the SDIF controlled eight banks; two more were taken over in October and a third on December 6 (IMF 2000a).

Capital injections came in two phases. The SDIF injected capital into the eight banks controlled prior to October on December 7, 2000 (IMF 2000a). The SDIF took over three other banks between October and December 2000 (IMF 2000a). The SDIF also injected these banks with additional capital amounting to 8% of their risk-weighted assets (IMF 2000a).  

The amount of injected capital to all 11 banks totaled TL 3.8 quadrillion ($6.1 billion) (IMF 2001). However, at the time, estimates of SDIF bank capital losses from increases in interest rates, securities portfolio losses, and takeovers were significantly higher (IMF 2001). By April 31, 2001, total public sector debt required to cover losses and NPLs was estimated as high as TL 13.7 quadrillion ($22 billion) (IMF 2001).

The SDIF borrowed $6.1 billion from the Treasury on November 16 in foreign currency and TL with a two-year grace period and repayment over the subsequent 10 years to cover the cost of capital injected in these eight banks (IMF 2000a). 

The eight SDIF-controlled banks prior to October 2000 and the three banks taken over in October and December 2000 were injected with capital (IMF 2000a). The SDIF recapitalized the eight banks controlled prior to October 2000 on December 6, 2000 and recapitalized the three banks taken over in October and December 2000 in subsequent months (IMF 2000a).

Source: Ozatay and Sak 2002.

As of November 16, 2000, the SDIF had 10 banks under its control (IMF 2000a). The SDIF also financially restructured and resolved the two banks taken over in October 2000 and Demirbank, though on a delayed timetable (IMF 2000a). Demirbank was eventually acquired by HSBC in 2001 (Dufour and Orhangazi 2009).

The SDIF recapitalized eligible banks through a transfer of government securities to a level of at least 8% of risk weighted assets (IMF 2000a).

After the November 2000 market turmoil, overnight rates again peaked in February following a political crisis (Ozatay and Sak 2002). The SDIF took over more banks between February and November 2001 (Ozatay and Sak 2002).

The SDIF created the capital through the transfer of floating-rate Treasury securities to the banks (IMF 2001). The Treasury notes paid quarterly coupons linked to borrowing costs and foreign exchange–linked bonds (IMF 2001). Coupons on floating-rate notes were linked to both the Central Bank of Turkey (CBT) repo rate and the average Treasury bill rate (IMF 2001). Floating-rate notes were preferable given the tight monetary conditions, severe interest rate shocks, and bank exposure to interest rate risk (IMF 2001). Losses were written off against capital thereby created (IMF 2000a). Loan-loss provisions were tax deductible to facilitate proper provisioning (IMF 2001).

By the end of March 2001, estimated losses in market value of Treasury securities held by SDIF banks and recapitalization notes issued in December 2000 totaled TL 2.5 quadrillion ($1.1 billion) (IMF 2001).

In the event the BRSA determined that a bank was failing to institute a suitable capital restoration plan despite having capital ratios below regulatory minimums, the BRSA could require the bank to skip dividend payments, cease making bonus or similar payments to the Board of Directors, limit nonprofitable operations, or liquidate inefficient assets (Turkey 1999, Article 14–1). If the bank failed to comply with a suitable capital restoration plan, the BRSA could transfer the management and control and privileges of shareholders except dividends to the SDIF (Turkey 1999, Article 14–1). Additionally, the BRSA had the right to transfer all management and control and privileges of shareholders except dividends of SDIF-controlled banks to the SDIF if shareholders, who directly or indirectly hold the bank’s management or control, used bank’s resources for their own interest, and jeopardized “the secure functioning of the bank” (Turkey 1999, Article 14–1).

The SDIF could take over shares through payment to shareholders of a share price determined “by deducting the loss from paid-up capital” (Turkey 1999, Article 14, Section 5[ac]).

As per Turkey’s December 18, 2000, Letter of Intent with the IMF, the SDIF was to select buyers for all banks by May 7, 2001 (IMF 2000a). Potential buyers were to submit “expression of interest” letters by December 15, and the BRSA was to notify investors of approval no later than December 22, 2000 (IMF 2000a).

The SDIF sold Bank Ekspres, Demirbank, Sumerbank, Sitebank, and Tarisbank by 2002, while other banks under SDIF control were merged (Saving Deposit Insurance Fund 2004). As of 2004, the SDIF merged or sold all banks excluding Bayindirbank, which it made a “transition bank to carry out the asset management function,” and Pamukbank, which the Fund merged with a public bank (Saving Deposit Insurance Fund 2004). The status of the banks taken over by the SDIF as of 2004 is detailed below in Figure 4.