III.1. THE BANKING SECTOR AND CREDIT POLICY

III.1.1. The Central Bank of the Republic of Turkey

In line with the tight monetary policy of the Central Bank, no support credit was extended in 1999 nor was any rediscount credit extended to the banking sector from the discount window. The use of preferential loans extended in previous years through the rediscount window was continued within restricted limits.

In order to support the development of the market for acceptance loans, term receivables of the exporting firms continued to be financed by rediscount credit after the delivery of goods and services. Either this credit was based on export bills backed up with loans or acceptance loans including the payment guarantee of a well known foreign bank or it was based on foreign currency bills, having not more than 120 days to maturity and are backed up by irreversible letter of term credit. Additionally, with Central Bank decision number 7825/17424 dated 19 August 1999, this facility was extended to include the financing of exports before the delivery of goods and services.

Developments in Central Bank Credit in 1999

Agricultural Loans

The 1998 year-end balance of the agricultural rediscount loans, which were used by the T.C. Ziraat Bankası under the limit restrictions that had been introduced on September 15, 1996, amounted to TL 7.2 trillion and remained the same in 1999.

The balance of the loans extended to sugar beet producers via Şekerbank for sugar beet purchases, under the restrictions limits introduced on December 19, 1991 and amounting to TL 55 billion by the end of 1998, remained the same in 1999.
 
 

Recent years have witnessed many new developments in central banking. The recent developments comprise many different areas, including changes in institutional as well as legal framework. The new developments include such basics as granting central banks sufficient independence to implement monetary policy within the market based rules, introducing modern instruments and techniques to operations in the foreign exchange and national money market, improving the quality of financial services by encouraging prudent operations in the financial system, establishing a legal framework which permits financial institutions to be monitored closely, and developing efficient accounting, payment and clearing systems.

The main development in the implementation of monetary policy is the inclination of the central banks to pursue policies targeting the inflation directly. Since the efficiency of the policies targeting monetary aggregates decreased significantly during the financial liberalization process, the industrial countries in particular started to substitute inflation targeting policies, which essentially require social reconciliation, for the policies targeting monetary aggregates.

Another notable development in central banking is the transition from national central banking to international central banking, within the framework of the European economic and currency union. To centralize their monetary policies within the European Union (EU) and harmonize their national policies, the European countries organized the European Central Bank (ECB). The ECB is mainly responsible for the following duties:

• Formulating and implementing the EU's monetary policy,

• Ensuring circulation of the Euro, which has been chosen as the common currency unit,

• Maintaining foreign currency operations,

• Providing equilibrium in the EU's balance of payments,

• Protecting and managing the member countries' official reserves.

Industrial Credits

The balance of the credit extended to the Halk Bankası to meet the working capital needs of artisans and craftsmen, which was TL 336.5 billion by the end of 1998, increased to TL 472.5 billion by the end of 1999. The nominal increase in these loans was 40.4 percent. The increase resulted from an exchange of bills between Halk Bankası and the Central Bank.

In accordance with the rediscount policy on acceptance loans, in 1999 the Central Bank extended credit after the delivery of goods and services amounting to TL 11.4 trillion, the face value of which was US $27.3 million. Additionally, the volume of credit extended by the Central Bank before the delivery of goods and services amounted to TL 1 billion, the face value of which was US $2 million. The balance of these loans was US $7.1 million by the end of 1999.

III.1.2. Banks

III.1.2.A. Developments in the Consolidated Balance Sheet and Profit and Loss Account of the Banking Sector.

a) Developments in the Consolidated Balance Sheet

The banking sector started 1999 with the take over of three financially weakened banks (Interbank, Bank Ekspress, and Turk Ticaret Bankasi) by the Savings Deposit Insurance Fund (SDIF). It was also a year in which the adverse consequences of the previous year's developments became visible in banks balance sheets.

Including the problem banks taken over by the SDIF⁽⁾ the total assets of the banking sector grew by 96.3 percent in nominal and 25.6 percent in real terms by November 1999, with respect to November 1988, reaching TL 67.7 quadrillion. When the growth in the total assets was analyzed in US dollar terms, the total assets of the sector, which had been US $114.6 billion by November 1998, was observed to have increased to US $131.7 billion by November 1999, increasing by 14.9 percent in US dollar terms.

As the total assets of the sector continued to grow in 1999, the ratio of the total assets of the sector to the GNP reached 87.5 percent by the third quarter of 1998, and to 110.4 percent by the third quarter of 1999. It should also be considered that the decline in real GNP significantly affected the increase in the ratio. The growth in the total assets of the banking sector resulted mainly from growth in three asset items, which had significant shares in the total assets. These items are the securities portfolio, the interest-and-income accruals, and the “other assets” item.

The item total loans, including the problem banks, had the largest share in total asse ts and declined in real terms by 0.8 percent by November 1999, with respect to November 1998. The decrease in the loan portfolio resulted from the recording of the problem banks' loans incorrectly as item overdue loans and the decrease in the loan demand due basically to the slow-down in economic growth. As the loans portfolio got smaller in 1999, the share of total loans in the total assets declined to 28.3 percent in November 1999, from its 1998 level of 35.8 percent. When the loans of the problem banks were excluded, the total loans of the sector were observed to increase by 1.4 percent in real terms, with respect to the previous year.

As a result of the decrease in loan demand by the corporate sector due to both the slow-down in economic growth and higher real rates of interests, the loan portfolio of the sector decreased. The slow-down in economic growth in 1999 caused the quality of the loan portfolio to deteriorate and the risk of lending to increase considerably. These unfavorable developments led the banks to cut back on lending and substitute the risk free government securities for the loans in their portfolios. Therefore, the securities portfolio grew considerably in real terms. By November 1999, the securities portfolio grew in real terms by 70 percent, with respect to the same month of the previous year, and reached TL 12.2 quadrillion. As a result, the share of the securities portfolio in the consolidated balance sheet total, which was 13.3 percent in 1998, had risen to 18 percent by November 1999.

The growth in the securities portfolio was due basically to the growth in the government securities portfolio. As mentioned above, the increase in the risk of lending operations led the banks to place their available funds into government securities. The increase in the demand for bank funds by the government to finance its increased expenditures was another significant factor underlying the increase in the securities portfolio. The third factor was the increase in total deposits and non-deposit liabilities, against which banks have to hold government securities to comply with the liquidity requirement. The total deposits had increased by 28 percent by November 1999, with respect to the previous November.

On the assets side of the consolidated balance sheet, an increase in the required reserves against deposits contributed to the growth of the total assets. An increase in the total deposits by 28 percent in real terms forced the banks to increase their required reserve holdings with the central bank to increase approximately by the same amount. As a result, required reserves against deposits increased by 29 percent in real terms by November 1999, with respect to the past year, and its share in the balance sheet total remained the same in 1999.

The effects of the adverse developments in international markets observed in 1998, were reflected in the banks' balance sheets in 1999. The most significant effect was the increase in net overdue loans. By November 1999, the net overdue loans of the sector, including the problem banks taken over by the SDIF, increased by 152.7 percent in real terms, with respect to the previous year, and reached TL 1 quadrillion. Put differently, the ratio of the net overdue loans to total loans, which was 2.1 percent in the previous year had risen to 5.4 by November 1999. When the banks taken over by the SDIF are excluded, the total amount of the net overdue loans declined to TL 692 trillion. The total overdue loans of the banks, except those of the problem banks, was TL 1.1 quadrillion by November 1999. These banks held a loan loss reserve of TL 424 trillion against their total overdue loans. Therefore, the net overdue loans realized as TL 692 trillion. Excluding the problem banks, the ratio of net overdue loans to total loans declined from 5.4 percent to 3.6 percent.

During 1999, the incomes-and-accruals item recorded a significant increase, and contributed to the increase in the total assets. Including the problem banks, the share of the incomes-and-accruals item in the balance sheet total rose from 10.2 percent in November 1998 to 12.5 percent in November 1999. By November 1999, the increase in this item was 54.6 percent in real terms, with respect to the same month of the previous year. When the problem banks were excluded, the real rate of increase in this item rose to 67.5.

An underlying factor behind the increase in the incomes-and-accruals item was the significant increase in the interest rediscounts calculated for the loans and securities. The increase in the loan interest rediscounts resulted largely from the discounts incorrectly made by some banks to their problem loans. That is, some banks incorrectly recorded their problem loans within the non-problem loans item, and made rediscounts at very high interest rates. This caused an increase in the item incomes-and-accruals. The second factor underlying the increase in the item incomes-and-accruals was the decline in interest rates observed in the last few months of the year. The decline in interest rates increased the market value of both the securities portfolio within the balance sheet and the off-balance sheet securities used in repo transactions.

During the analysed period, the receivables item from banks increased by 17.6 percent in real terms. Despite this increase, the share of this item in the consolidated balance sheet total did not change significantly and remained around 12 percent.

The other assets item, which has a significant share in the consolidated balance sheet total, increased by 22.3 percent in real terms. Despite the real significant increase in the other assets, the share of this item in the balance sheet total increased slightly from 13.6 percent in November 1998 to 13.3 percent in November 1999.

Several developments were observed in the liabilities side of the consolidated balance sheet. The share of total deposits rose from 58.1 percent in November 1998 to 59.2 percent in November 1999. Although the change in the share of total deposits in the consolidated balance sheet total is negligible, the change in its amount was substantial. Between November 1998 and November 1999, the total deposits increased by 27.9 percent in real terms. The main factors underlying the increase in the total deposits are the following. Firstly, the average maturity of the loan portfolio remained longer than that of the source of funds during the analysed period. Together with this, an increase in overdue loans caused the liquidity needs of the sector to increase considerably. Additionally, as the liquidity needs of the sector increased sharply, borrowing from international financial markets was difficult due to the adverse borrowing terms. Therefore, the banking sector increased its demand for deposits to meet its liquidity needs. The increased demand for deposits resulted in a significant increase in nominal interest rates on deposits. Combined with these developments, deceleration in the rate of inflation during 1999 caused the real rates on deposits to remain at high positive levels. For example, the real rate of return on Turkish lira denominated three-month time deposits, which has the highest share in total deposits, remained around 26 percent during the first eight months of 1999. Afterwards, the real rate of return on three-month deposits declined, due to the drop in nominal deposit rates, and remained around 18 percent.

Secondly, the real rate of return on the main deposit alternative, the repo transactions, remained at the same level as the return on deposits. This caused savers to remain undecided between the deposits and repo transactions. Consequently, both the deposits and the volume of repo transactions increased considerably. The total volume of the repo transactions increased by 49 percent in real terms by December 1999, with respect to the previous year. As a result of this increase, the ratio of the total volume of repo transactions to total Turkish lira deposits increased from 21 percent in December 1998 to 26 percent in December 1999.

The ratio of total loans to total deposits may be considered as a rough indicator of how much of the total deposits collected by the banking sector were lent out. This ratio declined from 61.5 percent in November 1998 to 47.7 percent in November 1999.

The item payable to banks, which is the second largest item on the liabilities side of the consolidated balance sheet, increased significantly in real terms. By November 1999, the item payable to banks increased by 34.6 percent in real terms, with respect to November 1998, and the share of this item in the balance sheet total rose slightly, from 17.5 percent to 18.8 percent, during the same period.

By the end of November 1999, the share of the total net worth of the banking sector in the consolidated balance sheet total, including the problem banks, declined from 8.4 percent from 10 percent in November 1998. When the problem banks were excluded, the share of the total net worth rose from 8.4 percent to 9.4 percent.

The net open FX position of banks, which is considered in the nominator of the legal ratio of the net FX position to the capital base, rose from US $2.7 billion in December 1998 to US $3.2 billion in November 1999. The total net FX position of banks, which is calculated as the difference between FX assets and liabilities, rose from US $2.6 billion in December 1998 to US $6.3 billion in December 1999.

b) Developments in the Consolidated Profit and Loss Account

Including the problem banks, the after-tax profit of the sector increased by 19.5 percent in nominal terms by September 1999, with respect to September 1998. However, the real after-tax profit of the sector declined by 22.6 percent during the same period. When the problem banks were excluded, the increase in the nominal profit rises to 46.6 percent, while the decrease in the real profits becomes 5 percent.

The main components of the after-tax profit of the sector are the interest incomes from loans and the securities portfolios. Including the problem banks, interest income from both the loans and the securities portfolios had increased by 12.9 percent and 33 percent in real terms, respectively, by September 1999. Excluding the problem banks, the interest income of the sector rose to 18.9 percent and 36.6 percent in real terms, respectively.

The increase in overdue loans caused the interest income from overdue loans to increase. By September 1999, interest income from overdue loans, including the problem banks, had increased by 71.3 percent in real terms, with respect to the same month of the previous year. When the problem banks were excluded, the annual rate of increase in the real interest income from overdue loans decreased to 58.2 percent. Although the annual rate of increase in the interest income from overdue loans is relatively high, its share in the total interest income is negligible. The share of the interest income from overdue loans in the total interest income rose slightly from 0.43 percent in September 1998 to 0.43 percent in September 1999.

As of September 1999, interest income from banks were observed to increase by 23.5 percent in real terms, with respect to September 1998, reaching TL 1.1 quadrillion.

The other interest and quasi-interest income item increased by 92.6 percent, with respect to the previous year, reaching 31.4 percent of the total interest incomes. TL 3.4 quadrillion of the other interest and quasi-interest and income belongs to the public sector banks, particularly to T.C. Ziraat Bankasi, and indicates the interest accruals on the receivables of this bank from the Treasury. The above-summarised developments resulted in an increase in the total interest income of the sector by 37 percent in real terms by September 1999.

As in the previous year, interests expenses paid to depositors constituted the largest part of the total interest expenses in 1999. Including the problem banks, interest expenses paid to depositors increased by 54.9 percent in real terms, with respect to the previous year. If the problem banks are excluded, the annual rate of increase in the interest expenses paid to depositors rises to 56.7 percent. An increase in the total deposits of the sector, together with the high real increase in the rates of interest on deposits, determined the large increase in this item.

A notable increase was observed in the interest expenses paid to banks item, which had the second largest share in the total interest expenses. As of September 1999, interest expenses paid to banks increased by 47.4 percent in real terms, with respect to the past year, reaching TL 1.9 quadrillion.

In addition to the developments summarised above, the banking sector made a loan loss provision amounting to TL 262 trillion for overdue loans; and thus, the net interest income of the sector after this provision realised at TL 3 619 trillion. This amount of net interest income indicated a decline of 4 percent in real terms, with respect to the previous year.

When the profits/loss situation of the various bank groups is analysed, it is observed that the foreign banks and the investment and development banks were successful in increasing their profits, while the public sector banks and private sector banks were not. The foreign banks and investment and development banks increased their after-tax profits by 22.1 percent and 13.4 percent, respectively.

The public sector banks and the private sector banks realised significant decreases in their profits in 1999. By September 1999, the profits of the public sector banks decreased by 82.4 percent in real terms, with respect to September 1998. Within the same period, the after-tax profits of the private sector banks decreased by 16.4 percent in real terms. A detailed analysis of the public sector banks indicates that the main reason for the significant decrease in the profits of this bank group is the sharp increase in interest expenses. Paralleling the high market share of the public sector banks in total deposits, interest expenses paid to depositors increased by 60.5 percent in real terms. This higher increase in the interest expenses to depositors caused the net interest income of the public sector banks, after the loan loss provisions to decline by 33.4 percent in real terms. The main factor determining the significant decrease in the profits of the private sector banks was the increase in total interest expenses. Within the September 1998 to September 1999 period, the total interest income of the private sector banks increased by 29.8 percent in real terms, while the total interest expenses of this bank group increased by 50 percent in real terms during the same period.

c) Deposits

The total deposits of the banking sector, excluding interbank deposits, had reached TL 40 quadrillion as of November 1999. This represents an annual increase of 100 percent in nominal and 28 percent in real terms. Compared to the previous year, the growth rate of Turkish lira deposits did not change significantly in 1999.

All deposit types other than official deposits and certificates of deposits increased in real terms. Turkish lira deposits rose to TL 19.6 quadrillion as of November 1998, with an annual nominal increase of 99 percent and a real increase of 27.3 percent. During the same period, foreign exchange deposits rose to TL 20.5 quadrillion, with an annual nominal increase of 101 percent and a real increase of 28.6 percent. The growth rate of foreign exchange deposits in terms of US dollar, which was 16.4 percent in November 1998, accelerated to 23.5 percent during the same period of 1999.

The breakdown of deposits by maturity reveals the fact that, when compared to the previous year, the maturity structure changed moderately in favor of longer terms in 1999. The share of demand deposits in total deposits, which was 23 percent in November 1998, declined to 16.6 percent in November 1999. During the same period, the share of one-month time deposits declined from 18 percent to 15.1 percent, whereas the share of three-month time deposits increased from 35 to 36 percent. The most significant rise was observed in six-month time deposits, whose share in total deposits increased from 15.6 percent to 22.2 percent. The share of one-year time deposits, on the other hand, increased from 8.3 to 10.2 percent (Figure III.1.1). Consequently, the average maturity of total deposits increased from 3.2 percent in November 1998 to 3.8 percent in November 1999.

The growth rates of Turkish lira deposits according to type are given below: As of November 1999, savings deposits increased by 113.6 percent, commercial deposits by 69.6 percent, official deposits by 97.5 percent, and other deposits by

87.5 percent in nominal terms with respect to the same month of 1998. Since certificates of deposit were legally abandoned as of January 30th, 1996, the volume of certificates of deposit decreased by 8.3 percent. As of November, the highest increase in real terms was realized in commercial deposits, which represents one-third of total deposits, with 36.7 percent. While the shares of savings and official deposits in total deposits increased in 1999, the shares of remaining deposit types declined (Table III.1.1).

Source: Central Bank.
 
 

d) Credit

The total loans of the banking sector reached TL 19.1 quadrillion as of November 1999, with an annual nominal increase of 55 percent. In real terms, on the other hand, the total loans of the banking sector decreased by 0.8 percent in the same period. Since economic activity slowed down in the second half of 1998 and then the economy entered into a recession in 1999 due to the drop in both domestic and foreign demand, the supply and demand of credit declined. Consequently, the loan to deposit ratio, which shows the amount of deposits channeled into credit, declined to 47.7 percent in November 1999. These unfavorable developments were also effective in the decline of the loan to asset ratio to 28.3 percent in November 1999 (Table III.1.2).

Source: Central Bank.

The share of private banks in the total loans of the banking sector was 63.5 percent as of November, while the share of public banks, development and investment banks, and foreign banks was realized as 26.4 percent, 6.5 percent and 3.6 percent, respectively (Figure III.1.2). In other words, there was no significant change in the shares of these bank groups’ in the loan market when compared to the previous year. The annual nominal increase in private bank loans was 56.6 percent in November 1999, whereas those of public banks, development and investment banks and foreign banks were 46.6 percent, 82.8 percent, and 53.3 percent, respectively. In real terms, these figures correspond to a 0.2 percent increase for private banks and a 17 percent increase for development and investment banks, but a 6.4 percent decrease for public banks and a 1.9 percent decrease for foreign banks.

When the composition of loans is analyzed, it can be observed that there was no significant change in the shares of foreign currency loans, expressed in Turkish lira terms, in total loans in 1999 when compared to the previous year. The share of Turkish lira loans was 51.7 percent in November, whereas that of foreign currency loans was 48.3 percent as of November. The annual nominal increase in foreign currency loans amounted to 54.2 percent in November.

When the average maturity of loans is analyzed, it is observed that the share of short-term loans was 77 percent and that of medium term loans was 23 percent as of October 1999.

The share of export loans was 25 percent as of November 1999, whereas those of special loans, fund loans, consumer loans and other loans were 9.4 percent, 8 percent, 3.8 percent and 39 percent, respectively.

As of September 1999, the distribution of total cash and non-cash loans according to various sectors is as follows: 15.3 percent of total loans was extended to the construction sector, 15 percent to the textile and textile products sector, 8.3 percent to the services of wholesale and retail commercial motor vehicles and household consumption goods, 7.8 percent to the financial intermediary services, 4.8 percent to the agricultural sector, and 4.6 percent to the basic metal products sector and to the sectors producing processed materials.

III. 1.2.B Legal and Administrative Regulations

The 1999 regulations related to banking are summarized as follows:

a) Regulations on Liquidity Requirements

1) Paragraphs (a), (b), (d) and (e) of Communiqué No.96/1 on Liquidity Requirements, which had been published in Official Gazette No.22704 (repeated issue) dated July 22, 1996, was amended by Communiqué No 99/1 on Liquidity Requirements published in Official Gazette No. 23610 dated February 13, 1999. The new Communiqué allows banks to meet 2 percent of liquid assets, which they should maintain for their commitments in the form of bills at a ratio of 6 percent for Turkish lira deposits and a ratio of 3 percent for their commitments for foreign currency deposits in the form of bonds, from their Turkish lira and convertible foreign exchange assets.

2) Paragraph (a) of Article 3 and the first clause of Article 7 of Communiqué No.96/1 on Liquidity Requirements, which had been published in Official Gazette No. 22704 (repeated issue) dated July 22, 1996 was amended by Communiqué 99/2 published in Official Gazette No.23902 dated December 10, 1999. With the new Communiqué, the ratio of liquidity assets to be maintained for Turkish lira deposits increased from 6 percent to 8 percent. The Communiqué stipulates that liquid assets corresponding to the additional 2 points will be maintained as Turkish lira free deposits with the Central Bank. Moreover, the penalty rate to be applied to banks that fail, partly or fully, to fulfill their commitments for liquidity requirements was determined as 1.5 times the maximum interest rate, instead of 1.5 times the average overnight interest rate realized at money markets conducted with the Central Bank.

b) Regulations on Required Reserves

With Communiqué No.99/1 published in Official Gazette No.23902 dated December 10, 1999, some changes were introduced to paragraph (a) of Article 3 and the second clause of Article 4 of Communiqué No.96/1 on Required Reserves, which had been published in Official Gazette No.22704 (repeated issue) dated July 22, 1996. Accordingly, the ratio of required reserves for Turkish lira deposits was reduced from 8 percent to 6 percent. Moreover, the penalty rate applicable in the event of any failure to fulfill a commitment for required reserves related to Turkish lira deposits was determined as 1.5 times the maximum interest rate, instead of 1.5 times the average overnight interest rate recorded in money markets conducted with the Central Bank.

c) Regulations on Standard Ratio for Foreign Currency Net General Position/Capital Base

Article 4 of Communiqué on Principles for Calculation and Application of Standard Ratios for “Foreign Currency Net General Position/Capital Base”, which was published in Official Gazette No.23448 dated August 29, 1999, was amended by Communiqué published in Official Gazette No.23777 dated August 5, 1999. By a new Communiqué, the “Standard Ratio for Foreign Currency Net General Position/Capital Base”, which was 30 percent, was reduced to a maximum of 20 percent and banks were granted a two-month transition period. Accordingly, the said ratio was applied as 30 percent until August 31, 1999 and as 25 percent between August 31, 1999 and September 29, 1999.
 
 

d) Regulations Related to Resource Utilization Support Fund

1) Pursuant to the amendments to Communiqué No.6 related to Decree No.88/12944 by Communiqué No.23 on the Resource Utilization Support Fund published in Official Gazette No.23776 dated August 4, 1999,

- Clause (a) of the 1st paragraph of Article 2 related to “Fund Deductions” was amended. Accordingly, the ratio of fund deduction for consumer loans extended by banks and finance corporations was reduced from 8 percent to 3 percent. Thus, the distinction between consumer loans and other types of loans extended by banks was eliminated.

- The clause amended to the 5th paragraph of Article 2 allows that the fund deductions for special permission import transactions, which are conducted in accordance with Article 77/2 of Customs Law No.1615, may be deposited between the actual date of import and the registration date of the bill of entry.

- Clause (22) amended to Article 3 concerning “Loans Exempt From Fund Deductions” provides that agricultural loans up to TL 2 billion extended by any finance corporation to farmers who are members of the agricultural cooperatives were also exempted from fund deductions.

2) Provisional Article 3, amended to Communiqué No.6 related to Decree No.88/12944 amended by Communiqué No.24, was published in Official Gazette No.23866 dated November 4, 1999 and became effective on the same date. The new Article states that persons and establishments who have been granted a “Certificate of Earthquake Damage” verifying that their production plants have suffered damage due to the earthquake recorded in Sakarya, Kocaeli, Yalova, Bursa, Bolu and İstanbul on August 17, 1999, will be exempt from fund deductions related to their import transactions in the nature of an acceptance letter of credit, payment on delivery and deferred-payment letter of credit conducted between August 17, 1999 and November 4, 1999, the publication date of the Communiqué, or to be conducted within 6 months of that date provided that the said persons and establishments have a certificate granted by the related Commerce Chambers, Industry Chambers or, Industry and Commerce Chambers to verify that the imported raw materials and intermediary goods are necessary for production or the imported machinery and equipment will replace those which were damaged by the earthquake.
 
 

e) Regulations Related to Special Finance Institutions

The 8th Central Bank Communiqué Concerning Special Finance Institutions published in Official Gazette No.23610 dated February 13, 1999 revised the 3rd paragraph of Article 11, entitled “Commitments for Legal Reserves, Ratio and Term for Establishing Required Liquidity”. The new Communiqué allows legal reserves to be held against Euro current and participation accounts. Accordingly, the required liquidity for US dollar and Swiss franc accounts, as shown in the required liquidity tables dated February 19, 1999, will be held in terms of their own foreign currency. However, for Euro, German mark, French franc, Dutch florin, Australian shilling, Italian lira, Belgium franc, Finnish markka, Spanish peseta, Portuguese escudo, Irish lira and Luxembourg franc accounts, this amount will be held in terms of Euros, German marks, French francs or Netherlands guilders. The required liquidity for other foreign currency accounts will be in terms of US dollars.

The Council of Ministers Decree No.99/13621 published in Official Gazette No.23903 dated December 11, 1999, amended paragraphs (c) and (d) of Article 2 of the December 16, 1983 amendment to Communiqué No.83/7506 on the “Establishment of Special Finance Institutions” governing the definitions of current and participation accounts. The new regulation eliminated the obligation for contracts. Instead, pass-books bearing the names of the account holders will be provided.

f) Regulations on Foreign Currency Transfers

The ratios for required foreign currency and foreign exchange transfers and sales were specified as “0 percent” for June, July, August, September, October, November and December of 1998 and January of 1999 in section D, “Required Foreign Currency and Foreign Exchange Transfers and Sales”, of the seventh Chapter “Managing Foreign Currency Position and Providing Information” in Central Bank Circular No.I-M. This circular, which was published within the scope of Decree No.32, concerns the “Protection of Value of Turkish lira”. The ratios for transfers and sales realized in February and March of 1999 were fixed at 0 percent as well, pursuant to Central Bank Circular No.99/1 published in Official Gazette No.23538 dated January 14, 1999.

Due to the fact that the Central Bank was able to sufficiently meet its foreign currency requirement via transactions conducted in interbank markets, it was deemed more appropriate to lift obligation for required foreign currency and foreign exchange transfers and sales with an amendment to the related article of Circular No.I-M, rather than with a provisional article. Consequently, the section entitled “D-Required Foreign Currency and Foreign Exchange Transfers and Sales” included in the chapter on the “Managing Foreign Currency Position and Providing Information” was revised by Central Bank Circular No.99/2 published in Official Gazette No.23650 dated March 25, 1999 and the ratio for foreign currency and foreign exchange transfers and sales was fixed at “0 percent” to become effective as of April 1, 1999.

g) Regulations on Classification of Bank Loans and Other Claims and Reserves to be Held

With “Decree Related to Principles and Procedures on Determining the Qualifications of Bank Loans with Required Reserves and Other Claims and on Reserves to be Held”, published in Official Gazette No.23913 (repeated issue) dated December 21, 1999, it was decided that bank loans and other claims would be classified under 5 groups (standard loans and other receivables, loans and other receivables being closely pursued, loans and other receivables with limited potential of recovery, doubtful loans and receivables, loans and receivables which are considered losses) according to their risk status. Moreover, general reserves would be held for loans in the 1st and 2nd groups as before, while loans in the 3rd, 4th and 5th groups would be subject to specific reserves. The said Decree would be applicable to loans which were extended or whose maturity dates were renewed as of January 1, 2000. Loans extended before this date would be subject to “Decree on Accounting Evaluation of Bank Loans in Compliance with their Qualifications and Loan Reserves” No.97/10497 dated December 30, 1997 and to the provisions of the communiqué related to the Decree, which was repealed by the new Decree.

h) Regulations on Calculation of Capital Adequacy of Banks

With “Communiqué Related to Principles and Procedures on Calculation and Evaluation of Capital Adequacy of Banks on the Basis of Consolidated Financial Tables”, which was published in Official Gazette No.23913 (repeated issue) dated December 21, 1999, the principles and procedures concerning the calculation and settlement of the Sandard Ratio for “Capital Base/risk-Weighted Assets, Non-Cash Loans and Liabilities” dated June 30, 1998.

 i) Amendments to the Banks Act

With Banks Act No.4389, published in Official Gazette No. 23734 dated June 23, 1999, Banks Act No.3182 was repealed.

1) The new Act governs the principles on incorporation, management, transactions, transfer, merger, liquidation and auditing of banks. Additionally, a Banking Regulation and Auditing Institution, with the status of a public entity with administrative and financial autonomy, would be established in order to ensure the enforcement of the Banks Act and other relevant acts, to supervise and conclude such enforcement, to ensure that savings are protected, and to carry out other activities or to exercise its power as defined in this Act by also issuing regulations within the limit of power granted by this Act.

2) With an amendment to Act by Law No.4491, which was published in the Official Gazette dated December 19, 1999 and became effective on the same date, powers - such as permission for the incorporation, merger and liquidation of banks, licensing to carry out banking operations and accept deposits, the revocation of a license to carry out banking transactions and accept deposits, the determination of loans subject to reserves to be assumed by Council of Ministers - were transferred to the Banking Regulation and Auditing Board, the decision-making organ of Banking Regulation and Auditing Institution. Moreover, amendments to Article 14 of the Banks Act related to measures to be taken against banks that carry out operations against laws and rules and/or whose financial structures are weakening would allow the transfer of such banks to the Fund in order to ensure their rehabilitation. Article 17 of this Act was also revised imposing personal liabilities on executives, managers and shareholders of banks who led to the enforcement of Article 14.

3) With the 6th paragraph amended to Article 20 of Act No.4389, pursuant to Article 11 of Act No.4491, special finance institutions were embodied in the Banks Act. Moreover, Article 17 of this Act repealed Council of Ministers Decree No.83/7506 related to Establishment of Special Finance Institutions as well as any and all legislation concerning this Decree.

According to Provisional Article No.3 of Act No.4491;

Special finance institutions operating on the effective date of this Act shall adapt their current structures to the provisions of Articles No.7 and 9 of Banks Act No.4389 within two years. Special finance institutions that fail to make such adaptation within the determined period will be liquidated pursuant to the general provisions.

III.1.2.C. Special Finance Institutions

The Special Finance Institutions (SFIs) were first introduced into the Turkish financial system in 1985, and the total number of these institutions reached 6 by November 1999. The total number of branches, and employees of the SFIs are 121 and 2611 respectively.

The balance sheet total of the SFIs, which was TL 841.2 trillion in November 1998, had risen to TL 1 595 trillion in November 1999, increasing by 89.7 percent in nominal and 21.3 percent in real terms. The relative size of the SFIs in the financial system, which is measured by the ratio of the total assets of the SFIs to the total assets of the banking sector, remained around 2.2 percent.

As of November 1999, the total net worth of the SFIs amounted to TL 89 trillion, and their share in the balance sheet total became 5.6 percent. The composition of the total net worth was as follows: paid up capital constituted 42.7 percent (TL 38 trillion), the revaluation fund which was composed mostly of the revaluation of fixed assets leased through financial leasing agreements constituted 34.6 percent (TL 30.8 trillion), legal reserves constituted 9 percent, and the profits constituted the 14.7 percent. As of November 1999, paid up capital increased by 56.5 percent in nominal terms and rose from TL 24.3 trillion to TL 38 trillion, with respect to November 1998.

The SFIs placed 88 percent of their total accumulated funds of TL 1.3 quadrillion into investments. During the same period, Turkish lira and FX denominated funds constituted 12 percent and 88 percent of the total accumulated funds, respectively. The SFIs placed 69 percent of the total accumulated funds in the form of FX assets and the remaining 31 percent as Turkish lira assets.

As of November 1999, overdue receivables of the SFIs increased by 132.8 percent in nominal and 48.9 percent in real terms, reaching TL 48.9 trillion. The SFIs made a loan loss reserve of Tl 30.8 trillion. This amounted to 63 percent of the total overdue receivables. The net overdue receivables, which amounted to TL 17.9 trillion by November 1999, constituted 1.5 percent of the total funds placed by the SFIs.

Liquid assets comprising cash assets, receivables from banks, and a securities portfolio amounted to TL 147.9 trillion by November 1999 and constituted 9.2 percent of the total assets of the SFIs.

As of November 1999, the after-tax profits of the SFIs reached TL 13.2 trillion, increasing by 38 percent in nominal terms with respect to the same month of the previous year. Despite this increase, the after-tax profit of the sector decreased by 11.6 percent in real terms.

The analyses of the developments in the FX position of the SFIs indicates that the SFIs operated with a closed or negligible open position in FX until 1997. After 1997, the open FX position of these institutions were observed to grow considerably. Consequently, the open FX position of the SFIs rose from TL 13 trillion in November 1998 to TL 91 trillion in November 1999.
 
 

In the aftermath of the Asian financial crisis, views regarding the need to increase efficiency in the supervision of banks became popular in the international arena. In line with this development, attempts to increase efficiency in banking supervision and harmonization of the rules set by the Bank for International Settlements (BIS) gained importance in Turkey. The new Banks Act No. 4389 was passed by the Parliament on June 18, 1999. With this new Banks Act, the official bodies presently responsible for supervision, regulation, and the guarantee of the interests of depositors are combined in a single administratively and financially autonomous unit called “The Banking Regulation And Supervision Agency”. With the latest change in the new Banks Act made by law no. 4491 on December 19, 1999, the authority limits of the Agency were further expanded. The Agency administrative board will be composed of seven members, who will be appointed by the board of ministries from among the candidates recommended by the minister for economic affairs. The Board is responsible for the following duties:

• Implementing the Banks Act, and determininig the conditions for the establishment and liquidation of banks.

• Supervising the banking sector,

• Guaranteeing the savings of depositors.

  With the establishment of this Board, problems arising from the absence of an autonomous body in the financial markets, where developments occur at a fast pace, are expected to disappear. Expected benefits of an autonomous supervisory unit for the banking sector are as follows:

• The problems arising from the conflict of authority among various government bodies can be minimized,

• The supervisory unit can quickly intervene during a systemic financial crisis,

• The flow of information between supervisory and deposit insurance bodies can be improved. In this way, the risks taken by banks can be more easily monitored.

The expansion of the responsibility of the Agency in such a way as to cover all the financial institutions in the system may be more beneficial.

III.2. CENTRAL BANK TRANSACTIONS

Following the Russian Crisis in 1998, international investors lost their confidence in developing markets, resulting in the capital outflows in these countries. Economic policies had to be formed in accordance with these developments since they also affected the Turkish economy. Within this framework, the second half of 1998 can be described as having liquidity needs and high levels of interest rates resulting from rapid capital outflow, difficulty in foreign borrowing and domestic borrowing at higher costs. This picture led the Central Bank to revise the targets determined by the Staff Monitoring Program (SMP) signed with the IMF and resulted in a small bias in the inflation target for the end of year. This flexibility in the monetary policy and strong foreign exchange reserves caused the effects of the crises on money markets to be slight and temporary. Thus, these effects gradually decreased towards the end of the year and left the floor to positive economic and political expectations.

The economic recession process triggered by the capital outflows in the second half of 1998 increased the fiscal pressures on the financial system. This situation required the Central Bank to be conservative due to the uncertainty created by the general elections although there were capital inflows and optimistic expectations as of the beginning of 1999. Interest rates remained high in the first four months of the year although they showed a declining trend.

Especially in the June-July period, after the elections, the optimistic expectations of the economic agents increased. At first, this was observed as a decrease in the interest rates, which lasted until the end of year with some cyclical fluctuations (Table III.2.1.). Decelarating inflationary expectations and the Central Bank’s quotations’ in the interbank money market have supported this trend. In addition, it was observed that the banks tended to sell foreign exchange to the Central Bank intensively due to capital inflows.

The Treasury’s domestic borrowing strategy in accordance with its announced program and success in foreign borrowing also contributed to this positive environment. In order to protect investors against risks and lengthen maturities, new borrowing instruments, such as bonds with fixed coupon payments and floating rate notes, were observed among the positive factors contributing to confidence in the economy. On the other hand, some developments occurring during the year retarded this trend and caused fluctuations.

Source: Central Bank.

(1) Auctions with fixed coupon , floating rate and indexed to CPI are not included.

The liquidity squeeze that started with the Russian crisis continued during 1999, and the total reserves of the markets showed negative sign. Salary and tax payments, the Treasury’s borrowing more than maturing amounts, the liquidity demand before the religious holidays and the Central Bank’s funding below the returns also supported the liquidity squeeze. Furthermore, the crisis in Brazil and the downgrading of the Turkish economy by an international rating agency in January, uncertainty resulting from general elections in April, the Marmara earthquake in August, and the capital outflow resulting from worries about the Y2K problem towards the end of year (in November and December), exacerbated the liquidity squeeze.

In addition to the fact that five banks were transferred to the Savings Deposit Insurance Fund in December and the banking system’s foreign exchange and currency demand to decrease their open positions were among the factors contributing to the liquidity squeeze. During the periods mentioned above, the Central Bank realized the most intensive interventions in the foreign exchange markets and a high and volatile trend was observed in interest rates. As a result, investors preferred to act reserved although they had optimistic expectations during the year. Due to expectations concerning an agreement to be signed with IMF, which could affect the macro balances positively especially in the second half of the year, interest rates decreased gradually until November and then sharply in the last two months of the year, which was observable from interest rates in bonds and bills markets in the ISE. Except for some short term fluctuations during the year, stability in financial markets and political structure after the elections brought about a relative increase in stability in the bonds and bills market. However, especially due to the liquidity squeeze, the margin between interest rates in repo-reverse repo market and the bonds and bills market widened in the secondary market.

For the liquidity squeeze, the Central Bank supplied Turkish lira to the markets via open market operations and transactions in the interbank money market. The government securities interest rates in the secondary market remained within the interval of Central Bank’s bid-offer quotations in the interbank money market until the last three months of the year. In the last quarter of the year, however, the decrease in expectations concerning inflation in 2000 caused the interest rates of government securities in the secondary market to drop considerably below the short term interest rates.

Although the rates in the Repo–reverse repo market remained above the official corridor, interest rates did not stay above the open market operations (OMO) interest rates. The positive environment in the markets resulting from the monetary program for 2000 announced in December caused the bond and bill markets interest rates drop sharply below the corridor. The behavior of the interest rates in the last two days of the year, when interest rates rose sharply due to the liquidity squeeze resulting from the year-end syndrome, did not reflect the general trend (Graph III.2.1).

In recent years, the Central Bank has been implementing a policy which includes a foreign exchange policy consistent with inflation forecasts and puts limitations on the growth of some balance sheet items. Within this framework, the Bank aimed to sustain stability in the economy on the one hand and external balance on the other.

In 1998, the Central Bank declared that it would implement a policy targeting the net domestic assets item in its balance sheet within the context of the SMP signed with the IMF. This policy has continued in 1999. Accordingly, the net domestic assets item was targeted as TL 800-900 trillion on the average for April 5-9^th, TL 100 trillion for the end of June, minus TL 1000 trillion for the end of September and minus TL 1100 trillion for the end of year. However, some deviations in these targets happened in the Central Bank’s favor following the decrease in the bank’s funding via OMO due to intensive capital inflows in the first half of the year. Net domestic assets realized at minus TL 369 and minus 899 trillion for April and June, respectively. In December, monetary and foreign exchange policy was rearranged with the stand-by agreement signed with the IMF. Accordingly, a new policy was determined, based predominantly on pre-announced foreign exchange rates to create base money in return for net foreign assets. In this policy, OMO, interbank money markets transactions, required reserves and foreign exchange interventions would still be used as instruments while transactions in Turkish lira would be used to decrease the fluctuations in net domestic assets but not for sterilization. The ceiling on net domestic assets target was changed to TL 1200 trillion. Thus, the average of the net domestic assets, which is going to be calculated by using current exchange rates on December 10^th , 1999 and on January 20^th , 2000 was used as performance criteria for December 31^st , 1999.

III.2.1.Open Market Operations

At the end of 1999, the value of securities in the OMO portfolio was TL 916,7 trillion, measured at purchase prices. In 1999, like in previous years, open market operations were used together with the foreign exchange market and the interbank money market to determine the liquidity in the economy in line with the monetary program in effect and to maintain stability in the markets.

During 1999, the net total amount injected via open market operations was TL 122,5 trillion. Analyzed on a monthly basis, it was observed that the Central Bank absorbed liquidity in the first half of the year while in the second half, except September, it injected liquidity into the markets via open market operations. In the first half of the year, funding via open market operations remained below the returns due to capital inflow. In other words, the markets met their liquidity needs by selling foreign exchange to the Central Bank with expectations of a low devaluation pace parallel to decreasing inflation expectations. The Central Bank mainly engaged in repo operations with one-week maturity auctions through its own window. Reverse repo transactions were realized in low amounts in the ISE, especially in the second half of the year, in order to prevent a sharp drop in overnight interest rates (Table III.2.2).

Sorce: Central Bank.

(*) (8)=(1) - (2) - (3) + (4) + (5) - (6) + (7).

As a result, in the balance sheet, OMO stock including interbank money markets transactions reached TL 2407 trillion at the end of 1999, up from TL 1831 trillion at the end of 1998. In other words, the debt of the system to the Central Bank increased by approximately 32 percent. OMO interest rates changed according to liquidity requirements in the markets and increased sharply, especially before the elections in April and at the end of the year due to liquidity squeeze and arrangement of foreign exchange positions although there was a downward trend throughout most of the year (Table III.2.1).
 
 

January 1^st : Euro, European Currency Unit, was introduced.

January 4^th : CBRT announced that the foreign exchange basket will be observed as US$ 1 + EURO 0,77.

January 5^th : The Treasury started to issue 2-year government bonds with quarterly fixed coupon payments.

January 8^th : Interbank (a private commercial bank) was transferred to the Savings Deposit Insurance Fund.

January 13^th : Crisis in Brazil.

January 22^nd : S&P changed Turkey’s rating from positive to stationary.

February 12^th : CBRT changed the liquidity ratios.

March 5^th: CBRT decreased the upper limit of quotations in the interbank money markets by 2 points from 79 percent to 77 percent.

March 24^th : The banks’ credit limits from the CBRT in the interbank money market were increased.

April 18^th: General elections.

June 9^th : The 57^th Government won the vote of confidence.

June 23^rd : Banking Law No. 4389 was published in the Official Gazette.

July 5^th : CBRT decreased the upper limit of its quotation in the interbank money markets by 3 points. Overnight quotations were determined as 46 and 74 percent.

July 5^th : CBRT introduced “overdraft facility” as a new instrument.

July 27^th : Treasury started to issue 3-year floating rate government notes with quarterly coupon payments.

August 11^th : CBRT introduced “Forward Transaction Limit” as a new instrument.

August 13^th : The amendment to the constitution concerning the international arbitration law was approved in the Parliament.

August 14^th : The change in the tax law was published in Official Gazette. The definition of income was changed and the Financial Millennium was delayed to 2002.

August 17^th : The Marmara earthquake.

September 1^st : The withholding tax rate on Turkish lira deposits and the witholding tax rate on interest revenue from repo transactions were increased to 13 and 12 percent, respectively.

September 8^th : CBRT decreased the upper limit of its quotations in the interbank money markets by 4 points. Overnight quotations were determined as 55 and 70 percent.

September 8^th : The Social Security Law was approved in the Parliment.

September 26^th : Turkey was admitted to G-20.

November 26^th : A 4 to 19 percent interest tax deduction on interest revenue from government securities was put into effect with the supplementary tax law. This caused a sharp increase in the bonds and bills market interest rates for a short period of time.

December 9^th : CBRT announced the 3-year monetary and foreign exchange program to start in 2000.

December 10^th : CBRT changed the reserve requirements and the liquidity ratios.

December 17^th : Banking Law No: 4491 was put into effect.

December 18^th : The law changing the Capital Market Board Law was published in the Official Gazette.

December 22^nd : Yurtbank, Egebank, Sümerbank, Yasarbank and Esbank were transferred to the Savings Deposit Insurance Fund.

Box grafik III.2.2
 
 

 III.2.2. Interbank Money Market Transactions

The number of banks in the interbank money market in 1999 reached 82 with the participation of eight new banks and the withdrawal of one bank. The total transaction volume was realized as TL 58.2 quadrillion, 98.5 percent of which was composed of overnight transactions, 1 percent of which was composed of T/N transactions (next day value; one-day maturity), 0.3 percent of which was composed of one-month maturity (Table.III.2.3).

Source: Central Bank.

(1) Transaction volume is one-sided.

The Central Bank was a net seller in the interbank money market during the year. Turkish lira injected by the Central Bank through this market (mostly overnight) showed a significant leap especially in April, May and December. The increase in the banks’ credit limit from the Central Bank to be used in the interbank money markets as of 24^th March and the relative decrease in the cost of borrowing from this market were the fundamental reasons for this jump. The reason for the increase in December, on the other hand, was the liquidity squeeze at the end of year (Table III.2.4).

Source: Central Bank.

(1) Net purchases are calculated by subtracting total sales from total purchases. Negative values indicate that sales are greater than purchases.

(2) These figures include other transactions as well as O/N, T/N and 1 month transactions.
 
 

During 1999, the Central Bank changed its quotations in the interbank money market three times: in March, July and September. The Bank aimed at supporting the downward trend in interest rates by decreasing the upper limit of quotations by 2 and 3 points in March and July, respectively. In addition, rapid capital inflow and the increase in net foreign assets that were observed, especially in July, affected the decision to lower the upper limit. The lower limit for quotations was raised by 9 points while the upper limit was lowered by 4 points in September. Thus, the Central Bank continued to support the downward trend in interest rates by lowering the upper limit. By raising the lower limit, the Central Bank aimed at narrowing the margin between the two rates and hindering the demand for foreign exchange that might occur in case of excess increase in liquidity. As a result, the average overnight interest rate realized in the interbank money market exhibited a stable downward trend during the year.
 
 

Source: Central Bank.

In 1999, the Central Bank initiated two new applications. Firstly, “overdraft facility” was introduced as of 5^th July in order to satisfy the urgent funding requirements during the day in the banking system and to remove the tightness in the payment systems. This application made available a fund for the banks amounting to their usable limits by paying ‘‘zero interest’’. A total of 54 banks used this facility. Secondly, banks were allocated forward transaction limits (FTL) in addition to their borrowing limits in the interbank money market for 1 and 3-month maturity and same-day transactions in order to maintain the depth and continuity of the forward transactions, and the broken maturity application was stopped. The Central Bank was not one of the sides of FTL which was initiated in 11^th August. A total of 36 banks used this facility.

III.2.3. Foreign Exchange and Foreign Currency Market Transactions

In 1999, the largest volume of transactions in the foreign exchange and foreign currency markets was realized in the Turkish lira-foreign exchange markets, with US $57.5 billion representing 58 percent of the total transactions. In second and third place, foreign exchange deposits with US $36.6 billion representing 37 percent and the Turkish lira-foreign currency market with US $3 billion representing 3 percent of the transactions (Table III.2.6).

Source: Central Bank.

(1) The transactions in the table are two-sided.

The foreign exchange and foreign currency market transactions were generally realized according to the banks’ demands in line with their foreign currency management and capital movements. As is known, the Central Bank has a foreign exchange policy that is consistent with its inflation forecast. Thus, the foreign exchange purchases and sales of the Central Bank in this market were particularly affected by the targets for the foreign exchange basket. When 1999 is examined, it can be observed that the Central Bank was in a net buyer position except for the last two months of the year. The banks started to sell foreign exchange and foreign currency in the first months of the year. One of the reasons for this was that the relative cost was lower for banks to meet their liquidity needs by selling foreign exchange. The decrease in the inflationary expectations also supported this situation. The crisis in Brazil and the downgrading of Turkey by an international rating agency in January, anxiety about general elections in April, the Marmara earthquake in August, and the worries about the Y2K problem at the end of the year caused foreign investors to sell the government securities in hand and buy foreign exchange. In addition, the banks’ demand for foreign exchange and foreign currency in order to close their position at the end of the year also increased.

The Central Bank continued to determine the monthly nominal devaluation rate of the foreign exchange basket parallel to inflation forecasts during 1999. Thus, the Central Bank aimed at both controlling inflation to some extent and curbing negative effects on the foreign trade balance. The Central Bank announced at the beginning of the January that it had changed the definition of the foreign exchange basket since the Euro started being used as of 1 January 1999. According to this, since 1 Euro was fixed as 1.96 DM, the current foreign currency basket started to be followed as 1 US $ + 0.77 EURO. As to developments in 1999, it was observed that the monthly increases in the average foreign exchange basket were above the monthly increases in the wholesale price index - except for April, July, August, September, October and December. The minimum increase in the monthly average foreign exchange basket was in July with 3.2 percent and the maximum increase was realized in December with 5.1 percent. According to the end-of-the-month figures, however, the minimum increase in the foreign exchange basket was realized in June with 3.1 and the maximum increase was realized as 5.6 in November.

III.3. THE SECURITIES MARKET

The total issues registered with the Capital Markets Board reached TL 641.3 trillion by October 1999, decreasing by 23.8 percent. This value had been TL 841.8 trillion for December, 1998. The total issue for the same period of 1999 was TL 1.2 trillion in real terms.

The total outstanding securities reached TL 25,690.6 trillion in the first 10 month period of 1999. Of this total, 85.7 percent was public sector securities and the remaining 14.3 percent was private sector securities. The total of private sector securities was only TL 3,684.3 trillion.

III.3.1. Primary Market

III.3.1.A.The Public Sector

The total public sector outstanding securities rose to TL 22,006.2 trillion in 1999, increasing by 86.7 percent in comparison with 1998. The public sector outstanding securities consisted of TL 17,824.3 trillion in government bonds and treasury bills. Government bonds issued in the first 10 month period of 1999 increased 2.6 fold. The Treasury’s need for loans continued in 1999 due to August 17^th earthquake and high domestic loan services along with the inability to curtail public sector expenditures.

The sale of TL 16,885 trillion in government bonds was realized in the first 10 months period of 1999. This was the highest increase in sales over the last five years. The sale of government bonds made up 71 percent of the market and continued to play an important role. The outstanding treasury bills took second place, but were down by 34.6 percent compared to the previous year. The outstanding treasury bills fell in 1999 as a result of intensive reimbursement and a drop of 32.4 percent in issuance of treasury bills compared to the previous year. The reimbursement of TL 8,478.2 trillion was realized for treasury bills in the January-October period of 1999. Then, the outstanding treasury bills decreased to TL 3,817.1 trillion from TL 5,840.9 trillion. Revenue sharing certificates and foreign exchange indexed bonds had not been issued for the last three years. It was observed that outstanding privatization bonds, which have been issued since 1996, rose to TL 364.8 trillion, increasing by 106.4 percent compared to the end of the previous year. The outstanding privatization bonds reached the highest level in 1999 due to the intensive issuance of new bonds in October in return for bank loans in order to supply revenue to the Privatization Fund for the payment of principles and interest on the matured privatization bonds that had been issued over the last five years.

The public sector continued to use funds in the market due to the increase in the public sector borrowing requirement.

Privatization implementations aimed to create a new sources for the markets by directing foreign and domestic savings towards the financial markets. They also aimed to lift the pressures on market funds that had been created by the high demand of the public sector. Nevertheless, attempts at privatization were unsuccessful in 1999. The revenue realized in 1999 was the lowest level, only US $22.9 million, since the privatization process began in 1985. The privatization programme was revised in 1999 in the light of new economic developments and the earthquake calamity. The auction and implementation schedules were revised for the last half of 1999 and for the first half of 2000. According to this schedule, Deniz Nakliyat, Ankara Sigorta ve Güven Sigorta were to be privatized via the block sale method. TURBAN and ORÜS’assets and establishments were to be sold or transferred in the third quarter of 1999. ETAĞ, TAKSAN, İŞDEMİR ASİL ÇELİK and 51 percent of Petrol Ofisi were to be privatized via block sale. EBK and the assets and properties of Türkiye Zirai Donatım A.Ş were to have been sold or transferred in the fourth quarter of 1999. Of these institutions, the real estate and properties of EBK, TZD, TÜGSAŞ, Sümer Holding and ORÜS were privatized via sale and transfer methods in February, April, October, November and December of 1999. No block sale, public offerings, international offerings or ISE sales methods were used in 1999. The amount raised from the sales of these properties and assets was US $18.3 million. The revenue from the transfers of incompleted assets was US $0.5 million. The amount raised from the privatization programme, together with the US $4 million from the prepaid transfers, reached US $22.9 million. Of this total, US $21.1 million was actually collected in 1999. Since 1990, the annual revenue from privatization was US $450 million on average, except for 1991 and 1996.

The total income from privatization realized at US $4.6 billion in the 1986-1999 period (Table:III.3.1). In the same period 113 institutions were completely privatized and 76 establishments remained within the framework of the privatization programme.

Source: Republic of Turkey Prime Ministry Privatization Administration.

III.3.1.B. The Private Sector

The total issues registered with the Capital Markets Board reached TL 641.3 trillion in the January-October period of 1999. The share of equities in the total was 78.1 percent. During this period, mutual fund participation certificates valued at TL 140.1 trillion were registered with the Capital Markets Board. This amount is 21.9 percent of the total securities which were registered with the Board. The values in real term were TL 911.6 billion and TL 251.2 billion for shares and mutual fund participation certificates, respectively.

The total outstanding private sector asset rose to TL 3,684.3 trillion in the first 10 month period of 1999, increasing by 94 percent compared to the previous year. This was mainly the result of improvements in the issuance of shares. No corporate bonds, commercial papers, asset backed securities, real estate certificates or profit-loss sharing certificates were sold in 1999.

The outstanding commercial papers, real estate certificates and profit-loss sharing certificates were zeroed. Corporate bonds were not issued in 1999. After the payment of TL 465.4 billion to creditors, the outstanding corporate bonds dropped to TL 5,028.2 billion, down by 8.5 percent. The asset backed securities amounting to TL 7,305 billion, which had been transferred from the previous year, were totally reimbursed.

Mutual Funds, Investment Companies, Real Estate Investment companies

Mutual funds, investment companies, and real estate investment companies gained importance as a result of an increasing number of individuals who attempted to capitalize their savings via institutional investors. This means that the formation of portfolios became more institutional through mutual funds.

The total portfolio value of mutual funds type A and type B, which are separated according to the percentage of shares in their portfolio, increased by TL 867.7 trillion. The value of mutual fund type B portfolios was TL 771.6 trillion. When the mutual fund type B portfolio allocations are analyzed, it can be observed that the value of the portfolio consists of 70.8 percent in reverse-repo, 20 percent in government bonds, 8.7 percent in treasury bills, 0.3 percent in shares, and 0.3 percent in foreign government bonds, foreign treasury bills, foreign shares, and other assets. As they had in the previous years, mutual funds continued to have more treasury bills and government bonds than equities in their portfolios in 1999 due to the high earnings on repo, government bonds, and treasury bills and the low credibility of shares.

In Turkey, the number of foreign mutual funds which made public offerings was 13 . The number of shares registered with the Board was a total of 854,458. Of this total, 313,053 shares were in circulation, the total value of which was US $4,337.8 thousand.

The number of mutual fund type A, which have been active in the markets since 1991, was 21 as of October 1999. The total market value of these funds was TL 27.4 trillion only for the month of October. Their portfolio consisted of 53.7 percent in shares, 18.5 percent in treasury bills, 17.2 percent in reverse-repo, 6.3 percent in government bonds and 4.3 percent in other assets.

III.3.2. Secondary Market

In the secondary market, the total trading volume rose to TL 637.7 quadrillion in the January-October period of 1999. The volume of the securities that were traded on the secondary market was mostly public sector securities, which made up 96.7 percent of the total transaction volume.

The transaction volume of public sector securities reached TL 616.5 quadrillion in October, 1999, an increase of 119.9 percent compared to December 1998. The traded volume consisted of 66.4 percent in government bonds and 33.6 percent in treasury bills. In the secondary market, the traded volume of government bonds rose to TL 409.4 quadrillion, increasing by 272.4 percent; and treasury bills reached TL 207.1 quadrillion, increasing by 21.5 in comparison with the previous year. Foreign exchange indexed bonds and housing certificates were not traded on the secondary market in 1999. The public sector continued to play an important role in the secondary market due to high earnings on public sector securities and endless public sector expenditures.

Private sector securities consisted of shares, bank bills and commercial papers, corporate bonds, and asset backed securities. The total volume of private sector securities traded on the secondary market was TL 21.2 quadrillion. This total consisted of 99.8 percent in shares and 0.2 percent in bank bills. The trading volume of commercial papers, which have not been traded on the secondary market since 1996, reached TL 199.8 billion for the first time in 1999. Corporate bonds and asset backed securities were not traded on the secondary market in 1999.

III.3.2.A. The Equities Market

In the Istanbul Stock Exchange (ISE) national market, the value of traded equities reached TL 26.5 quadrillion in the January-November period of 1999. Equities were traded intensively on the national market and equities traded on the regional and new company markets were comparatively low. In the equities market, the daily average trading volume hit its peak point. Having fluctuated throughout the year, it had increased 3.1 fold by November in comparison with January. This was brought about by economic measurements taken after the earthquake, expectations of Turkey’s candidacy for the European Community and the stand-by aggreement with the IMF.

While 6 new companies entered the equities market, 2 companies withdrew from the market. In short, 281 companies in total were active in the market, 253 of which companies were active in the national market, 10 in the regional market, 1 in the new companies market and 17 in the watchlist companies market.

III.3.2.B.The Bonds and Bills Market

Outright Purchases and Sales Market

In the outright purchases and sales market, the trading volume had realized TL 32.7 quadrillion by November,1999. It showed an increase of 81.7 percent compared to the previous year. The securities traded on the market belonged wholely to the public sector. In spite of small fluctuations throughout the year except in August, trade volumes showed an upward trend in this market and increased considerably starting in September. This was due to the impression given by the government that its stand on decreasing the inflation rate remained unchanged despite the earthquake. The drop in interest rates, the expectations of a stand-by agreement with the IMF and Turkey’s candidacy for EC membership also played a role.

The Repo-Reverse repo Market

Trading volume in the repo-reverse repo market reached TL 216.6 quadrillion, increasing by 122.6 percent whereas it had reached TL 97.3 quadrillion in 1998. The trading volume increased rapidly, starting in January and reaching TL 21.8 quadrillion in May. It showed more stable improvements starting in June and fell to TL 21.5 quadrillion in October . Then, an increase was observed in November and it reached TL 27.2 quadrillion. The daily average trading volume reached TL 1.5 quadrillion in November.

III.3.3.Intermediaries

A total of 139 intermediaries were active in the market, 49 of which had been established by banks but were acting independently.

The breakdown of security transactions on an intermediary basis showed that TL 637.7 quadrillion was realized in the January-October period of 1999. Of this total, 92 percent was realised by the intermediaries established by banks and the remaining 8 percent by other intermediaries.

The Capital Markets Board’s “Communiqué for Amending the Communiqué Corresponding to the Principles related to Intermediary Activities, and Intermediaries” was published in the Official Gazette and put into effect in July. Within the framework of this communiqué, intermediaries and intermediary activities were re-defined, stating how activities made on behalf of clients were to be carried out and placing certain restrictions on them. Moreover, it set up the rules for abolishing contracts between intermediaries and agents, with the exception of agencies set up by banks or taken over by banks. Intermediaries were required to submit an application to the Capital Markets Board within a year of the effective date of this communiqué if they wanted to establish new agencies or corresponding bureaus in place of the abolished agencies.

III.3.4. Istanbul Stock Exchange (ISE)

The Istanbul Stock Exchange (ISE) composite index showed an increase of 485.4 percent in nominal terms at the end of 1999 compared to the previous year (Table III.3.2). The composite index returns were positive for 133 of the 236 trading days of 1999, 56.4 percent of the total. The average of the positive returns, half of which were higher than 2.5 percent, was 3 percent, the standard deviation being 2.5 percent. The composite index returns were negative for 103 trading days. The average of the negative returns, half of which were less than 1.5 percent, was minus 2.5 percent, a standard deviation of 2 percent. The daily returns were between minus 1.9 percent and 2.9 percent in the newly created period, excluding the highest and the lowest 25 percent observations.
 
 

In 1999, developments in the Istanbul Stock Exchange can be evaluated in three main periods according to the cumulative returns. Period I (January 4 – April 7), Period II (April 8 – October 11), and Period III (October 12 – December 28). The first, second and third periods consist of respectively 58, 123, 55 days of the total 236 trading days. Figure III.3.2 shows the cumulative returns of the ISE composite index in 1999. The cumulative return of the composite index was 89.6 percent in the first period compared to the end of the previous year (Figure III.3.3).

While the cumulative return of the ISE dropped by 7.3 percent on January 25 compared to the end of the previous year, it increased by 43.1 percent on February 2 and continued to increase until the end of the first period. In the second period, almost 6 months, the cumulative returns of the composite index, which showed high volatility, fluctuated between 53.4 percent and 137.8 percent (Figure III.3.4). The composite index significantly increased in the third period, its cumulative return increasing by 485.4 percent at the end of the period compared to the previous year (Figure III.3.5).

Figure III.3.6 shows the returns and risks on a 20-day moving average of the composite index in 1999. Both returns and risks showed high volatility throughout the year. The risk/return relationship also fluctuated during the year. The correlation coefficient between returns and risks was 29 percent. However, the relationship between return and risk was different in the three periods of 1999. The correlation coefficients between return and risk were minus 42 percent in the first period, 44 percent in the second period, and 81 percent in the third period. In the first period, the negative return-risk relationship shows that the earnings of the investors decreased despite the high volatility. A positive high relationship between return and risk can be observed in the third period. Investors may have recieved high returns because they undertook higher risks in this period.

Figure III.3.7 shows the values of the daily average return and risk for the composite index during a month between January 1992 and December 1999. The average daily return was 0.8 percent and the average daily volatility was 3.4 percent in 1999.

Figure III.3.8 compares the predictions of the value at risk (VAR) and the realized values for the composite index returns in 1999. The value at risk, under normal market conditions, is an indicator which demonstrates the maximum loss that can be met at a significant level in a given period. For instance, the returns of the composite index must not be smaller than the value at risk predicted at a 95 percent confidence level for 236 trading days in 1999. The realized daily returns of the composite index were just 13-days less than the forward-looking value for the risk calculated according to average daily return and volatility values predicted by using the 20-day moving average technique in 1999.

Source: Istanbul Stock Exchange Monthly Bulletins.

(1) According to closing prices in terms of Turkish lira. Composite index January 1986= 1.

(2) According to closing prices in terms of US dollars. Composite index January 1986= 100. All are
end-of-year figures.