Turkish Banking Sector Analysis

.. the same period of the previous year, the total assets of the Turkish banking system grew by 88 percent in nominal terms and reached TL 42,896 trillion by the end of March 1999. Within the commercial banks groups, the growth rates were 90 percent for both state-owned banks and foreign banks and 95 percent for privately owned banks, while the total assets of the banks under the Deposit Insurance Fund increased only by 24 percent. A slow growth of 57 percent was observed in the development and investment banks. Turkish Banking System, March 1999 TL Trillion Annual per. Change USD Million Annual per.

change Dec. 1998 per. change Commercial banks 40,933 90 111,417 25 -1 State-owned 14,549 90 39,603 25 -3 Private 23,208 95 63,171 28 1 Banks in Fund 1,103 24 3,002 -19 -19 Foreign banks 2,073 91 5,641 25 10 Dev. and inv. banks 1,936 57 5,271 3 -5 Total 42,869 88 116,688 23 -1 The total assets of the banking system grew by 23 percent in dollar terms and reached USD 116,688 million. On the other hand, the total assets of the banking system declined nearly by 1 percent compared to the end of the previous year.

Accordingly, total assets declined in the banking groups excluding the state-owned commercial banks and privately owned commercial banks. Sector Shares The share of the commercial banks group in total assets reached 95.5 percent, increasing by one percentage point. Within the same group, the share of the state-owned banks rose from 33.6 percent to percent 33.9 percent, and the share of privately owned banks increased from 52.3 to 54.1, while the share of foreign banks remained almost the same at 4.3 percent. On the other hand, the share of the banks under the Deposit Insurance Fund declined from 3.9 percent to 2.6 percent. In line with that development, the share of the state-owned banks in total deposits reached 39.8 percent with an increase of 0.8 percentage point and the share of the privately owned banks rose to 53.6 with an increase of 1.1 percentage points.

However, the same ratio declined from 3.4 percent to 2.4 percent for the foreign banks and from 5.1 to 4.2 for the banks under the Deposit Insurance Fund. On the other hand, the share of the state-owned commercial banks in total loans fell down from 34.1 percent to 27.9 percent, while that of the banks under the Deposit Insurance Fund declined from 3.4 percent to 1.5 percent. The share of the privately owned commercial banks in total loans increased from 51.9 percent to 58.4 percent, while that of the foreign banks rose from 2.7 percent to 2.9 percent. The same ratio rose from 7.9 percent to 9.2 percent in the development and investment banks. Market Shares of Groups (percentage) T. assets T.

deposits T. loans 1998 1999 1998 1999 1998 1999 March Dec. March March Dec. March March Dec. March Commercial banks 94.6 95.3 95.5 100.0 100.0 100.0 92.1 91.3 90.8 State-owned 33.6 34.9 33.9 39.0 40.7 39.8 34.1 29.1 27.9 Private 52.3 53.3 54.1 52.5 52.4 53.6 51.9 57.6 58.4 Banks in Fund 3.9 2.6 2.6 5.1 4.3 4.2 3.4 1.5 1.7 Foreign banks 4.8 4.4 4.8 3.4 2.7 2.4 2.7 2.9 2.9 Dev.

And inv. banks 5.4 4.7 4.5 7.9 8.7 9.2 Concentration in Banking The share of the first five largest banks was 45 percent in total assets, 38 percent in total loans and 50 percent in total deposits, and the same shares for the ten largest banks were 67 percent, 71 percent, 71 percent, respectively. Concentration in Banking* (percentage) T. assets T. deposits T. loans 1998 1999 1998 1999 1998 1999 March Dec.

March March Dec. March March Dec March Five largest banks 44 43 45 48 49 50 43 40 38 Ten largest banks 67 66 67 70 72 71 72 66 71 *In terms of assets TL and Fx Structure of the Balance Sheet and Fx Position In nominal terms, the growth rates were 101 percent in TL assets and 72 percent in Fx assets. TL liabilities and Fx liabilities grew by 105 percent and 72 percent, respectively. The share of TL assets in total assets rose from 57 percent to 61 percent and the share of TL liabilities in total liabilities increased from 49 percent to 53 percent. By the end of 1998, the shares of TL assets and TL liabilities in the balance sheet total were 60 percent and 52 percent, respectively.

Foreign Currency Structure (percentage) and Fx Position (billion dollars) T. assets T. liabilities Fx position March March March 1998 1999 1998 1999 1998 1999 Commercial banks 42 38 51 46 -7.7 -8.8 State-owned 27 23 28 24 -0.2 -0.3 Privately-owned 52 48 63 59 -6.6 -6.6 Banks in Fund 42 18 62 47 -0.7 -0.9 Foreign banks 40 47 67 66 -1.2 -1.1 Dev. and inv.banks 63 60 63 59 -0.0 0.1 Total 43 38 51 47 -7.7 -8.7 The Structure of Assets The share of loans in total assets reduced by 10 percentage points to 36 percent The change on the loan accounts of Ziraat Bank A.S. had a significant effect in this decrease. Due to the transfer of some part of the loans accounts to the other accounts in the Bank, the share of other assets in total assets increased from 15 percent to 23 percent.

The shares of liquid assets and permanent assets increased by 1 percentage point to 33 percent and 8 percent, respectively. The share of government securities excluding repo in total assets remained the same at around 11 percent. While the share of Treasury bills reduced in total assets, the share of Government bonds increased. Selected Assets of the Banking Sector, March 1999 TL Trillion USD Million Annual per.change (TL) (USD) Percentage share March 98 March 99 Liquid assets 13,985 38,067 89 24 32 33 Loans 15,260 41,537 47 -4 46 36 Permanent assets 3,621 9,857 136 55 7 8 Non-perfor. loans (net) 908 2,471 603 361 1 2 Other assets 10,003 27,227 191 90 15 23 Total assets 42,869 116,688 88 23 100 100 The most considerable development has been the rapid growth in non-performing loans.

The non-performing assets (net) of the banking system increased by 603 percent and reached TL 908 trillion. Depending on this, the ratio of non-performing loans (gross) to total loans increased from 2.5 percent to 9.4 percent. The ratio of non-performing loans to total loans increased from 3 percent to 12.8 percent in the state-owned commercial banks and it increased from 1.5 percent to 2.7 percent in the privately-owned commercial banks. This ratio showed a considerable increase in the banks under the Deposit Insurance Fund and it rose from 10.8 percent to 260 percent. Non-performing loans /Total loans (percentage) March 98 December 98 March 99 Commercial banks 2.4 7.7 10.1 State-owned 3.0 5.6 12.8 Privately-owned 1.5 2.4 2.7 Banks in Fund 10.8 233.2 260.2 Foreign banks 1.1 1.3 1.5 Dev.and inv.banks 0.9 1.0 1.0 Total 2.5 7.2 9.4 The Structure of Liabilities As opposed to change in assets, the structure of liabilities remained almost the same.

The total deposit grew by 91 percent, its share in total liabilities increased by 1 percentage point to 65 percent. TL deposit and Fx deposit grew by 111 percent and 74 percent, respectively. The share of TL deposit in total liabilities rose by 3 percentage points, in contrast, the share of Fx deposit reduced by 3 percentage points and the share of both items realised as 32 percent. The non-deposit funds grew by 88 percent. The loans borrowed from abroad increased from USD 7.3 billion to USD 9.6 billion. The share of non-deposit funds in total liabilities stayed almost the same with 17 percent.

Selected Liabilities of the Banking Sector, March 1999 TL USD Percentage change Percentage share Trillion Million TL USD March 98 March 99 Deposit 27,673 75,326 91 25 64 65 TL 13,897 37,827 111 38 29 32 Fx 13,777 37,499 74 14 35 32 Non-deposit funds 7,113 14,928 88 23 13 13 Shareholders’ equity 2,577 7,015 60 5 7 6 Paid capital 1,791 4,874 83 20 4 4 Reserves 709 1,932 93 26 1 1 Revaluation fund 786 232 82 19 2 2 Loss 709 1,929 320 176 Total income 1,035 2,816 129 19 2 2 Current year income 587 1,220 55 2 1 1 Total 42,869 116,688 88 23 100 100 The shareholders’ equity excluding total income, (previous year income and current year income) grew by 60 percent. As compared to the growth rate of 125 percent in the same period of previous year, the growth of shareholders’ equity slowed down considerably. The most important reasons behind this were the growing of losses, unrealization of real increase in the 1998 income and the deterrent effect of taxation imposed on capital increases. Indeed, the current year income increased almost at the same rate with the inflation (55 percent in nominal terms, 2 percent in dollar terms) by the end of March 1999, and its contribution to the growth of shareholders’ equity remained certainly limited. The current year loss of TL 9 trillion (USD 42 million) at the end of March,1998 increased to TL 157 trillion (USD 427 million) at the end of March, 1999, while the total losses including previous year losses increased from TL 169 trillion (USD 700 million) to TL 709 trillion (USD 1,929 million). Net Current Year Income and Loss, March 1999 USD Million Percentage change Net income Loss Total net income Net income Loss Total net income Commercial banks 1,089 426 663 0 1078 -37 State-owned 80 215 -135 -74 881 -148 Privately-owned 887 48 838 27 432 21 Banks in Fund 7 162 -155 -30 3302 -3071 Foreign banks 115 1 114 53 81 53 Dev.and inv.banks 131 0 131 18 0 24 Total 1,220 427 793 2 905 -32 On the other hand, in the first quarter, net current year income (after deducting the losses) increased by 5 percent in nominal terms, in contrast, it reduced by 32 percent in dollar terms.

The total income of only profit-making banks increased by 55 percent in nominal terms. The ratio of shareholders’ equity excluding total income to total assets fell from 7.1 percent to 6 percent, while the ratio of shareholders’ equity including total income to total assets decreased from 9.6 percent to 8.4 percent. In the meantime, the profitability ratios showed a considerable slowdown. Therefore, both the ratios of average profitability of shareholders’ equity and profitability of assets reduced rapidly. The interest income increased by 107 percent in nominal term, in contrast, the interest expenditures grew by 132 percent. Depending on this development, net interest income after provision increased by 49 percent, which was lower than the inflation rate.

The contribution of non-interest income to total income improved from negative to positive, while non-interest expenditures grew by 81 percent. Consequently, the income before tax increased by 38 percent. The income after tax increased only by 5 percent, depending on the growing of the tax provision at 171 percent. Off-Balance Sheet Accounts Off-balance sheet total grew by 75 percent in nominal terms and 13 percent in dollar terms. Both the TL and Fx off-balance sheet accounts grew by 75 percent in nominal terms.

Guarantees and warranties increased by 53 percent, while, commitments and Fx and interest rate transactions grew by 87 percent and 84 percent, respectively. The repo transactions increased from TL 3,280 trillion to TL 5,694 trillion. The repo transactions with the Central Bank of Turkey increased by four times to TL 1,263 trillion, the repo transactions with non-financial institutions increased only by 23 percent and amounted to TL 2,802 trillion. August 1999 Change in the Social Security System Regulation Reform of the Social Security System, which was one of the top priorities of the government’s agenda, was realised. The parliament passed new legislation on the Social Security System. The effects of such a major social security reform will influence the future of the present as well as the next generation.

Within the context of the new legislation, the age of retirement was increased to 58 for women and to 60 for men. The number of paid-premium day is increased from 5,600 to 7,000. The new legislation also brought a phased transition to the system of unemployment insurance within 10 years. Standard Ratio for Foreign Currency Net General Position/Capital Base With amendment in the regulation concerning Principles on the Calculation and Application of Standard Ratio for Foreign Currency Net General Position/Capital Base published in Official Gazette dated August 5, 1999, the Standard Ratio for Foreign Currency Net General Position/Capital Base was decreased from 30 percent to a maximum of 20 percent. It was decided that the new standard ratio would be reduced gradually in order to be effective as of January 1st, 2000. Decree on Accounting for and Valuation of Bank Credits and Funds Covering Credits With the Decision No. 99/13202 published in the Official Gazette dated 14.08.1999, some amendments has been made in Decree on Accounting for and Valuation of Bank Credits and Funds Covering Credits.

According to new legislation, banks are required to set aside as general reserves 0.5 percent of the total of their cash credits and the dischargeable account receivables that are secured by 1st group of collaterals and 0.2 percent of letters of guarantee, guarantees and other non-cash credits. In addition, In case of inability to collect value of compensation of non-monetary credit or of those converted into monetary credits within 30 days after the payment or date of conversion, the credit extended is considered fallen in default. Banks are obliged to remove their cash credits fallen in default from the credit account to enter them into the account receivables to be discharged. If the part fallen in default is collected within one month, it is transferred into the credit account. With a provisional article, this period of one month shall be applied as 60 days till 2000, and the implementation of the previous period of time will continue as of 01.01.2000. Privatization Attracting foreign productive capital, promoting economic efficiency, and raising revenues to contain public debt are the key goals of the government privatization program. Within the context of the privatization program, the government has tried to undertake necessary legal measures including those to allow for international arbitration, to permit an acceleration of the privatization in the energy and telecommunication sector.

In August, the draft law changing some articles of the Constitution has been passed through the Parliament. With the change in the Article 47 of the Constitution, the concept of privatization is stated in the Constitution for the first time and the paragraphs below are added to the Article. The principles and procedures related to the privatization of enterprises and properties owned by the State Economic Enterprises and other Public Legal Entities shall be determined by Law. Which of investment and services governed by the State Economic Enterprises and other Public Legal Entities to be made provided by real or legal entities on the basis of legal contracts shall be determined by Law Constitutional change also enabled disputes on privileged agreements concerning public services to be solved through national and international arbitration. International arbitration shall be applied only to disputes including foreign features. With an amendment in the 2nd paragraph of the Article 155, the State Council is commissioned with communicating its opinion on privilege agreements concerning public services within two months, and with examining drafts on regulations and solving administrative disagreements.

Tax Reforms – The parliament approved the legislation, which brought certain changes in some tax laws. – Financial Millennium was postponed, and definition of income was changed, thus the previous implementation will continue for income earned between 1999-2002. – Financial Millennium was postponed to the year 2002. Hence, repo and deposit gains that will be earned between 01.12.1999-31.12.2002 will be subject to withholding tax and no declarations are required for them whatever the amounts are. – For gains derived from the discharge of marketable securities, the period for exemption is reduced from one year to 3-months and the limit is increased to TL 3,5 billion.

– No transactions will be carried out depending on the declarations made on 30.09.1998. – Income tax rates except for wage income are increased by 5 points. – Surveys and works of art are exempted from taxation. – Changes was introduced in corporate tax – The provisional corporate tax rate that is calculated over gains in 6 months periods is reduced to 20 percent from 25 percent. The Board of Ministers is authorised to increase or decrease the rate by 5 points.

– The part of gains thats added to the capital of the institution from the sale of subsidiary shares and immovables of the taxpayer in the year of sales is exempted from corporate tax. – The gains that will arise from the addition of production units as capital in kind to new companies will be exempt from corporate tax between 01.01.1999-31.12.2002. – The gains derived through the sale of the stocks issued -at the establishment or the increase of capital- above their nominal values of the joint stocks and those which are exceptional, will not be taxed at point. – The Board of Ministers is authorised to change the revaluation rate used in the calculation of real estate tax base between zero and the rate declared. September 1999 Total Assets of Banking System (USD billion) 1970 1980 1990 Sept. 1999 Commercial banks 5.2 18.5 52 127 State-owned banks 3 8 26 46 Privately banks 2 8 25 72 Banks under the Fund 3 Foreign banks 0.2 0.5 1 6 Inv.

and dev. banks 1 2 5 6 Total 6.2 18.5 57 133 Total (as per. of GNP) 44 31 43 80 Selected Balance Sheet Items of Banking System (As of Sept. 1999 USD billion) TL Fx Total Assets Liquid assets 21.8 24.6 46.4 Marketable sec. 14.3 8.0 22.3 Loans 20.6 20.8 41.3 Permanent ass. 9.1 1.8 10.9 Others 32.1 2.0 34.1 Total 83.6 49.1 132.6 Liabilities Deposits 45.1 42.7 87.8 Non- deposit funds 4.6 16.0 20.6 Others 10.8 2.5 13.3 Shareholders equity 7.4 0.1 7.5 Current year profits 3.4 3.4 Total 71.3 61.3 132.6 October 1999 Change in Taxation Method for Government Securities Within the context of changes introduced by the Tax Law No. 4369, approved in July 1998, the valuation for Government Bonds, Treasury Bills and Revenue Sharing Certificates at market value instead of purchase value was brought, and income from these securities became subject to provisional tax. Provisional Taxation The provisional tax implementation of 25 percent on a 3-monthly basis was brought in July 1998.

With Law No. 4444 in August 14, 1999 the rate of provisional tax was reduced to 20 percent from 25 percent and the period of collection was increased to a 6-monthly basis. Article No. 279 of the Tax Procedures Code An amendment on the valuation of securities in Article No. 279 of the Tax Procedures Code was made in July 1998.

According to the amendment, shares and the participation certificates of mutual funds, who invest at least 51 percent of their portfolios in the stocks of companies established in Turkey shall be valued at purchase price, and all other marketable securities shall be valued at market value from December 31, 1999. However, the date of implementation has been postponed to December 31,1999 in the 1999 Financial Year Budget Law No. 4393. Implementation of Article 279 and Provisional Taxation The implementation of Article 279, which ensures the transfer of real value of securities into financial tables, affects likely institutions having a high amount of government securities in their assets. Since these institutions have to involve unrealised interest revenues at the end of period with their tax assessment. For purposes of the provisional tax implementation, banks are required to take into consideration the accrued interest of their government securities while submitting declarations on February 15, 2000 covering both the 4th quarterly period provisional tax and income-loss statements for the year 1999. The implementation on the valuation of securities at market value will be valid during the calculation of income.

November 1999 Additional Taxation The government has already passed a new law on additional taxation, which was initially designed to meet part of the huge costs of two recent earthquakes in Turkey. The new law, which was published in the Official Gazette dated November 26,1999, introduced additional taxes on a wide range of income and corporate revenues and commercial transactions. Within the context of the law regarding the banking sector, the additional taxes were introduced including four to 19 percent interest taxes on government bonds issued before December 1, 1999 depending on maturity, and an additional corporate tax of 5 percent. As being valid from as of January 1, 2000, the rates for additional interest tax on government bonds issued before December 1, 1999 are stated as below: 1) Of the discount bonds and bills: – 4 percent from those whose due date falls 1-91 days later, – 9 percent from those whose due date falls 92-183 days later, – 14 percent from those whose due date falls later than 183 days. 2) 4 percent from the interest payments for the bonds with three-year maturity, variable interest, and quarterly coupon-payment, 3) 19 percent from the interest payments for the bonds with three-year maturity, fixed interest, and quarterly coupon-payment.

The amount of this obligation, which has the nature of additional tax may not be offset against the taxes to be paid, but may be charged as an expense item in determining the commercial income (Law no.4481, promulgated in the extra issue of the Official Gazette dated 26.11.1999, numbered 23888). December 1999 Recognition of Turkey’s Candidate Status to the EU Turkey’s candidate status for full-membership to the European Union has been recognised officially at the Helsinki European Council. The unanimous recognition and announcement of Turkey as a candidate country at the Helsinki Summit, and the declaration in a clear and decisive manner that Turkey will be treated on an equal footing with the other candidates are positive developments for Turkey. Disinflation Program As an extension of the Staff Monitoring Program signed with the International Monetary Fund in July 1998, a new Stand By Agreement has been signed recently between the Turkish government and IMF. Within the context of the new agreement, that is to last for three years, the Turkish government launched a disinflation program, which is aiming to achieve disinflation and growth at the same time. Within the context of the program, the Central Bank of the Republic of Turkey (CBTR) announced its exchange rate policy and monetary policy. The strength of the Program enhances the credibility of the disinflation goals.

In setting disinflation goals for 2000-2002, of main importance has been balancing the need to signal a clear break away from the past, against the difficulty of bringing inflation down to lower single digits abruptly, given the inertial component that inflation has in Turkey. The fundamental goals of the program are given as, ? To bring down the inflation rate through implementing consistent, credible and persistent fiscal, income, monetary and exchange rate policies, all supported by structural reforms. ? To reduce real interest rates to plausible levels, ? To increase the growth potential of the economy, ? To provide a more effective and fair allocation of the resources in the economy. The main pillars on which disinflation program will operate; a) The first pillar is a tight fiscal policy that consists of increasing the primary surplus, realising the structural reforms and speeding up the privatisation. b) An income policy in line with the targeted inflation is the second pillar. c) Monetary and exchange rate policy actions constitute the third pillar, which aim to support the contribution of the first two in decreasing both inflation and interest rates, and to provide a long-term perspective to the economic agents. And the main targets are determined in the Program are given as below; – 12-month CPI (Consumer Price Index) inflation rate: 25 percent by the end of 2000, 12 percent by the end of 2001, and 7 percent by the end of 2002.

– Public sector primary surplus: equivalent of 2.2 percent of GNP (for the year 2000) – Cash domestic debt: constant at 27 % of GNP – Total debt stock : constant at 61 % of GNP Monetary Program of CBRT Within the context of the new agreement, that is to last for three years, the Central Bank of the Republic of Turkey (CBTR) announced its exchange rate policy and monetary policy. The monetary and exchange rate policies are to be guided by two considerations. First, disinflation and a rapid decline in interest rates require that monetary and exchange rate developments become more predictable, so as to reduce the uncertainty on the value of financial investment for both residents and nonresidents. The strengthening of fiscal policy under the program, level of international reserves, coupled with the financial support from the international community, make the introduction of such a commitment feasible. Secondly to avoid to be locked into a monetary and exchange rate framework that while appropriate for disinflation may lead to unnecessary rigidities in the long run, a problem that has affected many emerging markets in recent years. Hence, there is a need for a transparent and pre-announced exit strategy from this exchange rate regime.

Exchange Rate Policy: Main features of CBTRs exchange rate policy are as follows: – The exchange rate basket is to be announced on a daily basis covering one-year period. – The exchange rate basket composed of 1 US dollar + 0.77 EURO will continue to be valid. During the implementation of the program the exchange rate policy will be designed in two different exchange rate regimes and in two different periods. In the first 18 months which is between January 2000 and June 2001, nominal value of the basket will be increased according to the targeted inflation rate and in the following period the exchange rate policy will be carried out with respect to a progressively widening band. This band will widen at a rate of 15 percentage points per annum, measured from edge to edge. The total width of the band will thus reach 7 percent by end-December 2001, 15 percent by end-June 2002, and 22 percent by end-December 2002.

Monetary policy; The most important tool of CBTR at reaching its final objective of inflation is to follow the preannounced path of the basket without permitting any deviations from that. The reflection of exchange rate and monetary policy is to be followed in the context of the main aggregates from the balance sheet of CBTR. Monetary policy and balance sheet of CBTR are designed by imposing a floor to net international reserves in addition to a ceiling restriction for the net domestic assets item (NDA), which are fundamental aggregates of the balance sheet. During each quarter, NDA is to remain broadly constant at its December 1999 level) while allowing some limited flexibility (about +,- 5 percent of total base money) during the quarter to avoid excessive volatility in overnight rates. Within this context, all base money is to be created through the balance of payments and domestic interest rates are to be fully market determined, and no capital movements will be sterilised. The interbank interest rates posted by CBRT are to be adjusted daily in line with the movements of the overnight money market rates. Amendment in the application of Reserve Requirement and Liquidity Requirement With the new amendment concerning the application of reserve requirement and liquidity requirement, which was published in the Official Gazette dated December 10, 1999, the reserve requirement ratio is decreased from 8 percent to 6 percent. On the other hand, 2 percent of TL deposits is to be held as free deposits with the Central Bank. This new liquidity requirement may be met on the average of daily data for the reserve requirement period, rather than on a continuous basis.

Thus, without causing any change in the total of the legal requirements, banks are provided with flexibility in meeting their liquidity needs on weekdays. Recent Amendments in the Banks Act No.4389 In June 1999, the parliament had approved a new Banks Act. With the Law No.4491, which was published in the Official Gazette dated 19.12.1999 No.23911, certain amendments have been made in this Act in order to strengthen key prudential regulations and to place the banking supervision framework on a proper foundation by increasing transparency and independence in the operation of the Banking Auditing and Regulation Board (BRSA), and providing all of tools needed for the improved resolution of problem banks. The Banking Auditing and Regulation Board became fully autonomous by removing the involvement of the Council of Ministers from all decisions in the area of supervision other than the appointment of the members of the Board. The decisions to license and delicense banks, and to approve provisioning regulations are rested with the Board. With the recent amendments, three years period during which a Board member was prohibited from the employment as a senior executive in the banking sector, a provision made it difficult to find active professional to take Board positions, was eliminated as well. The Board is to be named by the end of March 2000, and to be in full operation by the end of August 2000.

The prudential standards were strengthen for bank lending to owners and to single or related parties. The ratio of loans to those having an indirect relationship is to be declined from the current 75 percent of capital to 25 percent until 2007. With the new amendments, the Savings Deposit Insurance Fund was given authority and responsibility to restructure a problem bank to facilitate its sale in full or in part or to liquidate the remainder based on existing laws. The fund is no longer permitted to lend or otherwise provide liquidity support to banks other than those under its full control. New Provisioning Regulation Decree on procedures for determination of types of loans and other types of receivables that banks are required to set aside provisions, No: 99/13761 was published in the Official Gazette dated 21.12.1999.

With the new regulation, more stringent loan loss provisioning in line with international standards is to be applied fully to all new loans, including renewal of any existing loans, from January 1, 2000. According to the Decree banks are obliged to categorise their loans and other receivables into five subdivisions ranked according to recoverability and creditworthiness. The provisions to be set-aside by banks in respect of their loans and other receivables shall be in accordance with the collaterals value and the ability to liquidate them within the legal framework. Application of Consolidation Principle in the Banking Regulations Necessary modifications have been made recently in the regulations related to the capital adequacy and foreign exchange exposure limit of banks to apply on a consolidated basis. Within this context, two Decrees related to the principles concerning the accounting and implementation of the standard ratio for foreign currency net general position/capital base on a consolidated basis and the principles and procedures on the measurement and valuation of capital adequacy of banks on a consolidated basis are published in the Official Gazette dated 21.12.1999, be.