News Brief No. 02/1

News Brief: IMF Welcomes Turkey's Bank Recapitalization Scheme

January 11, 2002

Michael Deppler, Director of the International Monetary Fund's (IMF) European I Department and Stefan Ingves, Director of the Monetary and Exchange Affairs Department, today issued the following statement regarding the private bank recapitalization scheme in Turkey:

"The IMF welcomes the strong emphasis on measures to ensure the soundness of the banking system in the Turkish government's economic program. A sound banking sector will ensure confidence of depositors, a return to normal credit growth, and reduced pressures on interest and exchange rates. Sound and profitable banks will contribute revenue to the budget, enhance public debt sustainability, and set the stage for economic recovery.

"The Turkish authorities have already implemented major financial sector reforms. The regulatory and supervisory frameworks have been overhauled. The large state banks have been rehabilitated, and a large number of insolvent private banks have been taken over by the Savings Deposit Insurance Fund (SDIF) and their owners have lost their stakes. Last year, market turbulence and a worsening economic environment led to losses in banks and undercapitalized banks were required to bring in new capital. However, the prospect of additional loan losses has created a need to put in place additional measures to safeguard the private banking system.

"The government's new bank support scheme, the legislative aspects of which were passed by Parliament yesterday, is designed to help the remaining private banking system survive the current depressed state of the economy, while still making bank owners fully liable for all losses the banks have incurred. It therefore involves no bailout of private bank owners with public funds. The scheme is part of the new economic program to be supported by the IMF. The full legal and regulatory framework for the scheme is expected to be put in place shortly. The scheme will start with rigorous targeted valuations of all banks' loan portfolios to identify possible losses and capital shortfalls. Losses will be fully borne by existing owners, and banks will be asked to bring in additional capital. The government will be prepared, through the SDIF, to match private contributions of new equity and also provide convertible subordinated loans to enhance banks' capital position. While government shares will have preferential status, the scheme is designed to give private owners incentives to rehabilitate their bank, and also provide the SDIF with appropriate ways of selling its shares in due course. Regulations by the Bank Regulation and Supervision Agency (BRSA) will provide details of the scheme, which will be fully transparent.

"The scheme is considered necessary at this point, given the likely scarcity of new capital from existing owners or new investors in Turkey and abroad under present market conditions. The scheme is designed to show government support of the banking system, while minimizing overall public sector costs. The IMF supports this scheme as the least cost solution to deal with remaining banking sector weaknesses," the statement said.