ABSTRACT
The Turkish financial sector has shown remarkable progress in the period following the 2001 crisis. The improved macroeconomic conditions in the country, the increased fiscal discipline of the government and the restructuring of the institutional setting for the financial system were among the domestic causes of this development. Very favorable international liquidity conditions, international institutions’ influences and the reforms in global banking standards were also profoundly effective factors during this transformation. Banking constitutes the major component of Turkey’s financial sector. In 2008, banks’ balance sheets comprised 88 percent of the balance sheets of the sector (Table 5.1). Hence, this chapter will analyze the developments in the banking sector to evaluate the financial sector’s progress since 2001. The catastrophic crises in 2000 and 2001 paved the way for a structural reform process in Turkey. Since the weaknesses in the banking sector were considered to be a major cause for the crises, efforts to restructure the Turkish economy were particularly focused on the banking sector. Extensive research was conducted in the immediate post-crisis era to analyze the crises and to
evaluate these efforts. The more recent period up to 2008 in which some results of the restructuring and transformation have surfaced remains unexplored. This chapter attempts to fill this gap. In the 1980s, the planned economy with its heavily restricted banking sector left its place to the changes effected by the attempts of liberalization in the Turkish economy, in sync with the rising neo-liberalism in the world. Despite considerable improvements, the lack of an institutional structure was a major impediment. The 1990s were marked by high inflation, increasing public expenditures and excessive public sector borrowing. In this decade the government turned mainly to commercial banks, which in turn relied on short-term capital inflows, for deficit financing. Banks had little function as financial intermediaries; their main business was to lend to the government at high rates and borrow from abroad by exposing themselves to serious currency risk. State banks, which constituted a significant portion of the banking sector, were also largely used by the government to accomplish political objectives. They suffered duty losses for which they engaged in short-term borrowing at high interest rates, subjecting themselves to interest rate risk. A confidence breakdown, the ensuing capital flight and the consequent rush to foreign currency led to the collapse of the IMF-supported exchange rate anchor program of 1999. The heavy depreciation of the currency resulted in the severe 2001 crisis, affecting especially the banks with serious open positions. As a result of this crisis, the banking sector had to go through immense restructuring, with the total cost of the process amounting to 35.9 percent of GDP in 2001 (Steinherr et al. 2004). There was at least one good side to this devastating crisis. It provided regulators with a suitable environment to initiate a structural reform process. The Banking Regulation and Supervision Agency (BRSA) implemented a series of fundamental regulations on many issues including foreign exchange exposure, connected lending practices and capital adequacy standards. State banks were relieved of the burden of duty losses and some measures were taken to enhance their efficiency. The convergence of the regulatory framework to international standards and the proactive policies of the regulators are among the main reasons for the current soundness of the financial sector. Basel-II was the international benchmark for determining the regulatory framework. Redefining the risk groups of certain balance sheets assets, and increasing the provisions for certain offbalance sheet items and credit card installments are some examples of the proactive measures taken by the regulators in order to control banks’ asset growth and risk taking. Regulations were accompanied with improving macroeconomic conditions and the tight fiscal practices of the government on the domestic front. Meanwhile, favorable global liquidity conditions prevailed in international markets. In the post-crisis period, the number of banks in Turkey decreased until 2006 and has stayed at 50 since. Their asset and liability structure reflects financial deepening and increased intermediation activities. Profitability has been on the rise since 2005, and is now quite high compared to most European countries.
