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Turkish Bank Capital Adequacy - Too Little, Too Late
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Short Description: will determine a bank's capital position and methods. that can be used to improve it. All banks will. undergo an independent audit of their end-2001 ...
Content Inside: Banks Turkish Bank Capital Special Report Adequacy - Too Little, Too Late Analysts n Summary Edward Thompson · Although most privately owned Turkish banks meet minimum +1 212 908 0364 regulatory capital guidelines, we feel many of them are edward.thompson@fitchratings.com undercapitalised by international standards. This is principally due to one or more of the following characteristics: a) a Botan Berker +90 212 279 1065 relatively high level of unreserved problem loans; b) excessive botan.berker@fitchratings.com loans to related parties; c) higher systemic risk in the banking system; and d) weak free capital due to significant investment Gordon Scott in bank premises and other permanent assets. This results in +44 207 417 4307 an elevated level of Tier II capital within the capital structure. gordon.scott@fitchratings.com Due to these factors, Fitch believes that Turkish banks need capital ratios meaningfully above the minimum standard. · Some risk weighting should be assigned to bills and bonds issued by the Turkish Treasury (currently weighted at zero). This overstates the capital of banks with a high proportion of these instruments in their balance sheet. · In order to effect a recapitalisation of the banking system as dictated by the recent agreement with the International Monetary Fund, the Banking Regulatory and Supervisory Authority (BRSA) has adopted methods of augmenting the capital structure of undercapitalised banks. · Banks that have an 8% risk-weighted capital ratio after three audits of end-2001 financial information and a review of loan quality will be deemed (by the BRSA) to have adequate capital. However, in Fitch's opinion this level of capital is inadequate in a volatile and higher risk operating environment. · The BRSA has relaxed the regulatory definition of the capital base by eliminating the deduction of loans to stockholders holding 10% or more of the bank's shares. While this helps banks to achieve the regulatory minimum ratio, it is a concern that the BRSA is weakening the calculation. In our analysis of capital and asset quality, we consider the risk in these loans, judge whether or not there should be additional credit loss reserves, and reflect the result as a diminution of equity in calculating capital adequacy. · The three-stage audit process has not been completed. Fitch will review how prudent the process is during meetings with management. · Due to their ability to manage balance sheet size and the inclusion of Tier II capital, most banks will meet the required minimum ratio without accessing additional capital from the government. However, meeting the ratio will restrict their ability to grow and expand their lending by taking on higher risk-weighted assets. It will also leave a question mark over the ability of many banks to build sustainable franchises. · This process is not enough in itself to strengthen the capital structure of many of the Turkish banks unless they comply with the spirit of the law. 01 May 2002 www.fitchratings.com
