This country-specific Q&A provides an overview to banking and finance laws and regulations that may occur in Turkey.
This Q&A is part of the global guide to Banking & Finance. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/banking-finance-2nd-edition/
What are the national authorities for banking regulation, supervision and resolution in your jurisdiction?
There are five lead national authorities for the regulation of banking sector in the Republic of Turkey (“Turkey”); the Central Bank of Turkey (the “CBRT”); the Banking Regulation and Supervision Agency (the “BRSA”) and the Banking Regulatory and Supervision Board (“BRSB”) as the decision-making authority of BRSA; the Saving Deposits Insurance Fund of Turkey (the “SDIFM”); the Capital Markets Board (the “CMB”) and the Financial Crimes Investigation Board (“FCIB”).
Other national regulatory authorities that also oversee the relevant aspects of banking activities in Turkey are as follows:
(i) The Competition Board;
(ii) The Data Protection Board;
(iii) The Consumer Protection Board;
(iv) Revenue Administration; and
(v) Ministry of Treasury and Finance.
National authorities listed above under Section A, the CBRT, BRSA, CMB and FCIB being primary authorities, are also supervisory authorities for banks and financial institutions in Turkey, relating to specific matters such as cross-border lending transactions, money laundering and financing of terrorism, KYC requirements, data protection and Basel compliance.
The SDIF is a public legal entity which has a unique role in execution and bankruptcy proceedings of banks in Turkey and been granted with exceptional powers. As such, the SDIF is authorized to take over the management and audit banks whose operation permit has been revoked due to insolvency reasons and fulfill the necessary operations for financial restructuring or the bankruptcy and liquidation of the same.
Which type of activities trigger the requirement of a banking license?
Pursuant to Article 4 of the Banking Law (Law No. 5411) (the “Banking Law”) a banking license is required in order to conduct, amongst others, the following activities in Turkey:
(i) Deposit and participation fund taking;
(ii) Lending (including cash and non-cash loans, factoring, forfeiting and financial leasing services);
(iii) Payment, collection and discounting services (including issuance of credit and deposit cards, cash or book-entry payments and fund transfer services, correspondent banking);
(iv) Capital markets related services (including custody services; conducting FX and derivative transactions, transactions involving precious metals and stones and providing intermediation services relating to the same; intermediating in the issuance or public offering of capital markets instruments);
(v) Insurance agency and individual private pension funds services; and
(vi) Any other activities deemed as a banking activity by the BRSB.
Activities that can be conducted based on a banking license vary, depending on the type of banks as explained under Question 3 below.
Furthermore, banks in Turkey may be subject to additional licensing requirements as per the capital markets legislation, depending on their activities relating to capital markets services and products.
Furthermore, banks in Turkey may be subject to additional licensing requirements as per the capital markets legislation, depending on their activities relating to capital markets services and products.
Does your regulatory regime know different licenses for different banking services?
Turkish banks are classified as (i) deposit banks, (ii) participation banks and (iii) development and investment banks under the Banking Law and an operation license covers all banking activities; however, depending on the bank type, activities to be conducted under an operation license would vary. As such, (i) deposit banks cannot engage in participation fund taking or financial leasing activities; (ii) participation banks cannot engage in deposit taking activities; and (iii) development and investment banks cannot provide deposit taking or participation fund taking services.
Furthermore, some activities listed under the Banking Law are subject to separate licensing requirements if such activities are to be conducted by entities other than banks such factoring, financial leasing, e-money issuance, payment and investment services.
Does a banking license automatically permit certain other activities, e.g., broker dealer activities, payment services, issuance of e-money?
A banking license enables banks to conduct other services such as dealer or payment services activities as explained under Questions 2 and 3 of this Guide.
Furthermore, certain investment services (i.e. intermediation in public offerings of capital markets instruments, investment advisory services and portfolio management) cannot be conducted by deposit banks and participation banks. Development and investment banks are entitled to conduct such investment services as subject to the relevant licenses of the CMB. Furthermore, no bank is able to operate multilateral trading systems and on-the-counter market places, irrespective of bank type.
Is there a “sandbox” or “license light” for specific activities?
Under the Banking Law and the secondary legislation thereof, those who are willing to engage in licensable activities listed in Article 4 of the Banking Law are required to obtain an operation license from the BRSB, as explained under Question 7 below. As such, there is no concept analogous neither with “sandbox” which may allow companies to test any banking products and services before making an investment in such business in Turkey nor with any quasi license such as “license light” allowing companies to conduct certain activities that exceed the threshold under a sandbox.
Are there specific restrictions with respect to the issuance or custody of crypto currencies, such as a regulatory or voluntary moratorium?
Other than the below-mentioned announcements, there is no provision of Turkish law that currently prohibits or otherwise regulates the issuance or custody of crypto currencies.
According to the BRSA announcement dated November 25, 2013, it has been clarified that Bitcoin does not fall within the definition of “electronic money” under the Law on Payment and Securities Settlement Systems, Payment Services and Electronic Money Institutions (Law No. 6493) due to its present structure and functioning and obstacles in surveillance and supervision of the same as there are no guarantees provided by any authority in Turkey for Bitcoin since it is not issued by a public or private entity in Turkey. Additionally, the CMB has issued a letter dated December 1, 2017 wherein it has stated that brokerage companies and customers shall not carry out spot or derivative transactions based on virtual currencies with their consumers since no regulations or definitions are available and virtual currencies are not listed among underlying assets under the Capital Market Law.
The Financial Stability Committee announced in its press release dated January 11, 2018 numbered 2018/01 that it is decided to establish a working group for the development of regulations on crypto currencies which do not have a legal basis and to inform the public on the risks relating to crypto currencies. The Financial Stability Committee further noted that the persons trading with crypto currencies should be aware of the risks they might face and negative sides to dealing in crypto and they should be careful as not to make losses or suffer any damage. Lastly, the CMB has provided a definition for “digital assets” and further indicated that most of the practices for raising money by using block chain technology (e.g. crypto currencies, token sales) do not fall under the regulation or supervision area of the CMB, in the CMB bulletin dated September 27, 2018 numbered 2018/42. Bearing in mind that crypto currency and token sale practices have similarities and differences with public offering and crowdfunding, any transaction relating to these activities needs to be analyzed on a case-by-case basis in order to determine whether it should fall within the scope of the CMB regulations.
In a nutshell, since there is not yet any piece of legislation that prohibits or indicates the illegality of issuance of crypto currencies or transacting with the same, these transactions are not deemed unlawful by the authorities in Turkey, however, also not secured with any guarantee by such authorities as the risks relating to the same are set forth on numerous occasions.
What is the general application process for bank licenses and what is the average timing?
Pursuant to the Banking Law, the BRSA is the authorized entity for granting banking license in Turkey and applications shall be made to the BRSA. Licensing for operating as a bank is a two-step procedure; first an incorporation permit must be obtained from the BRSB in order to establish a bank or a foreign bank's branch in Turkey and secondly, an application should be made to the BRSB for an operation license to carry out banking activities in Turkey.
A. Incorporation Permit
Pursuant to Article 7 of the Banking Law following conditions shall be met for incorporation as a bank:
(i) Incorporation in the form of a joint stock company (anonim şirket) with a minimum paid-in capital of TL 30 million;
(ii) Shares must be registered and issued against cash;
(iii) Articles of association and founders shall be compliant with the Banking Law;
(iv) Board of directors members shall be professionally qualified for the projected activities compliant with the corporate governance rules applicable to banks;
(v) Envisaged scope of activities must be consistent with the anticipated financial, managerial and organizational structure;
(vi) Shareholding structure shall be transparent and there should not be any issues that could prevent consolidated auditing.
Application for incorporation permit shall be made to the BRSA with the documents required under the Regulation on Operations of Banks Subject to Permission and Indirect Shareholding (the “Permission Regulation”). BRSA is entitled to require any further information and document(s) as deemed necessary. The incorporation permit shall be issued by the BRSB within 3 months following the respective application and becomes effective upon publication in the Official Gazette.
B. Operation Permit
Following the publication of the incorporation permit in the Official Gazette, an application for operation license shall be filed with the BRSA within 9 months, failure of which would result in the revocation of the incorporation permit.
In order to be granted with an operation license, the share capital of a bank shall be paid in cash and be sufficient to conduct the contemplated activities. Additionally other requirements shall be satisfied such as (i) the BRSA shall be provided with evidence proving that 25% of the system entrance fee at an amount corresponding to 10% of the minimum capital required by the Banking Law has been paid to the SDIF; (ii) activities of the bank shall comply with the corporate governance principles and the bank shall have adequate personnel and technical equipment; (iii) managers shall be qualified as set forth in the corporate governance principles.
The BRSB shall issue its decision on the grant of operation license within 3 months following the application. Operation licenses also become effective upon being published in the Official Gazette by the BRSB.
Is mere cross-border activity permissible? If yes, what are the requirements?
As per the Banking Law, Turkish banks are entitled to (i) open branches or representative offices, (ii) establish partnerships, or (iii) participate into the share capital of existing partnerships outside Turkey, including off-shore banking regions, subject to the approval of the BRSB and provided that corporate governance principles under the Permission Regulation and protective provisions set out under the Banking Law and any other principles to be determined by the BRSB are complied with. Additionally, Turkish banks can extend foreign currency or Turkish Lira loans to persons or entities located outside Turkey pursuant to the Decree No. 32 Regarding Protection of the Value of Turkish Currency issued by the Council of Ministers under the Law No. 1567 (“Decree No. 32”).
That being said, cross-border activities of foreign financial institutions conducted with Turkish residents, generally trigger licensing requirements under Turkish law other than cross-border lending activities. As such, foreign financial institutions (or other companies located abroad, if the laws of their jurisdiction of incorporation allow them to do so) may extend loans to Turkish residents subject to the requirements and restrictions of the Turkish foreign exchange legislation set forth case by case based on the specifics of each transaction.
What legal entities can operate as banks? What legal forms are generally used to operate as banks?
Only the entities incorporated as joint stock (anonim şirket) companies are allowed to operate as banks in Turkey.
What are the organizational requirements for banks, including with respect to corporate governance?
Turkish banks are required to establish following bodies, committees and units as a result of organizational requirements under Turkish law:
- Board of Directors;
- Audit Committee;
- Corporate Governance Committee;
- Remuneration Committee;
- Internal Systems Units consisting of (i) internal control; (ii) internal audit; and (iii) risk management units;
- Compliance Unit in relation to compliance with anti-money laundering legislation;
- Credit Committee (if the Board of Directors delegates its credit-related duties).
Pursuant to the Regulation on Corporate Governance Principles of Banks (the “CG Regulation”), the main corporate governance principles that banks should comply with by taking into consideration the size of their activities and their organizational types, are, amongst others, (i) establishment of corporate values and strategic goals; (ii) explicit determination of the scope of authorities and responsibilities within the bank; (iii) competency of board members and the senior management required for effective performance of their duties; (iv) efficient use of internal and independent auditors’ operations; (v) establishment of remuneration policies compliant with the ethical values and strategic goals and (vi) transparency.
Additionally, the Corporate Governance Communiqué No. II-17.1 issued by the CMB sets forth further requirements applicable to publicly held banks related to, inter alia, (i) composition of the board of directors and appointment of independent board members, (ii) establishment of a corporate governance committee, and (iii) transactions with related parties other than those arising from ordinary activities.
Do any restrictions on remuneration policies apply?
The Guide on Good Remuneration Practices at Banks (the “Remuneration Guide”) sets forth criteria for the establishment of remuneration policies to ensure efficient risk management.
Remunerations for non-executive members of board of directors and remuneration committee members shall be fixed to avoid any conflicts of interest. Any variable remunerations; such as performance based bonuses and premiums, to executive members of the board of directors and senior management should be based on objective criteria and not affect the bank’s corporate values negatively, as per the CG Regulation.
Payments to employees of internal systems units should be mainly fixed and determined independently of the performance of the operational units audited, supervised or controlled by the same.
Fixed and variable components of total remunerations granted to the specialized employees having a material impact on the bank’s risk profile shall be determined based on the performance of (i) the respective employee; (ii) such employee’s unit and (iii) the bank, considering negative and positive consequences of the assumed risk. Moreover, the percentage of the fixed components in the total remunerations for specialized employees shall be high enough, enabling the bank to refrain from paying the variable component, where necessary. No performance-based payment amount should be guaranteed in advance (other than sign-on bonuses).
Systemically important banks shall also comply with the following requirements on remuneration practices with respect to their specialized employees: (i) at least 40% of the variable remuneration shall be paid by spreading the same to periods; provided that the deferring period is not less than three years, (ii) at least 50% of the variable remunerations shall be paid with non-cash instruments listed in the Remuneration Guide; (iii) an appropriate retention time during which the specialized employees cannot dispose of the said non-cash instruments shall be determined; and (iv) variable remunerations shall be made available subject to cancellation and redemption agreements. Additionally, systematically important banks are required to make annual public disclosures on certain qualitative and quantitative details regarding their respective remuneration policies. Banks other than systemically important banks shall comply with the above-mentioned remuneration restrictions as well as the disclosure requirements; to the extent possible based on their own practices, risk structures and strategies.
Has your jurisdiction implemented the Basel III framework with respect to regulatory capital? Are there any major deviations, e.g., with respect to certain categories of banks?
Basel III framework with respect to regulatory capital is implemented in Turkey applicable to all banks irrespective of their type under the (i) the Regulation on Own Funds of Banks (“Regulation on Own Funds”); (ii) the Regulation on Capital Maintenance and Cyclical Capital Buffer; (iii) the Regulation on Calculation of Banks’ Liquidity Coverage Ratios; (iv) the Regulation on Measurement and Evaluation of the Capital Adequacy of Banks (“CM Regulation”) and (v) numerous communiques and guides on risk calculation and reduction methods with regards to credit, securitisation, operational, currency, market and country risks in line with Basel III framework.
In line with Basel III, the statutory capital adequacy standard ratio for equity capital of banks is 8%. Note that the BRSA has announced a higher target capital adequacy ratio of 12% and banks are expected to achieve and maintain a capital adequacy ratio that is higher than 12%. Additionally, banks shall maintain a minimum Tier I capital adequacy ratio of 6% and a minimum core capital (i.e. Common Equity Tier I capital) adequacy ratio of 4,5%. The BRSA is authorized to increase such ratios taking into consideration internal systems, assets and financial conditions of banks and to impose different capital adequacy ratios to different banks.
Furthermore, pursuant to the Regulation on the Internal Systems of Banks and Internal Capital Adequacy Assessment Process, banks in Turkey are also required to implement an Internal Capital Adequacy Assessment Process in order to internally calculate the capital adequate to cover the risks faced by banks and might be faced in the future by taking into consideration that bank’s risk profile, risk appetite and activities, and the volume and complexity of its transactions.
Basel Committee on Banking Supervision Regulatory Consistency Assessment Programme (“RCAP”) assessment team also determined and announced in its March 2016 report on assessment of Basel III risk-based capital regulations that Turkey is in compliance with the Basel risk-based capital standards with all underlying components following the last updates in the legislation took place in 2016 .
Are there any requirements with respect to the leverage ratio?
Basel III leverage ratio framework is implemented in Turkey under the Regulation on the Calculation and Evaluation of the Leverage Levels of Banks (the “Leverage Regulation”) in order to ensure that banks maintain adequate levels of capital on consolidated and unconsolidated basis against risk exposure. The leverage ratio shall be calculated on a monthly basis and similar to Basel III, the Leverage Regulation stipulates that the quarterly arithmetical mean of the monthly-calculated leverage ratios of banks shall not fall below the minimum leverage ratio of 3%.
What liquidity requirements apply? Has your jurisdiction implemented the Basel III liquidity requirements, including regarding LCR and NSFR?
Basel III liquidity framework is implemented in Turkey under the Regulation on the Calculation and Evaluation of Liquidity Adequacy of Banks; the Regulation on the Calculation of Banks’ Liquidity Coverage Ratios (the “LC Regulation”) and various guides on the liquidity management tools for banks, including, amongst others, the liquidity management policies, liquidity stress tests and liquidity buffers in order to ensure that banks in Turkey achieve and maintain (i) adequate levels of liquidity and (ii) high quality liquid assets in order to effectively serve their debts with their assets and meet their net cash outflows.
There are two different liquidity adequacy ratios in Turkey: (i) overall liquidity adequacy ratio (the “OLAR”) (i.e. the ratio of a bank’s TL and foreign currency denominated assets to the TL and foreign currency denominated liabilities) and (ii) foreign currency denominated liquidity adequacy ratio (the “FCLAR”) (i.e. the ratio of a bank’s foreign currency denominated assets over the foreign currency denominated liabilities).
The OLAR and FCLAR are subject to weekly legal reporting and calculated for both the first maturity segment (i.e. 0 to 7 days) and the second maturity segment (i.e. 0 to 31 days) and shall not be less than 100% and 80% respectively on both consolidated and unconsolidated basis.
The liquidity level of a bank shall be determined as per the leverage coverage ratios (“LCR”) of the respective bank and such ratio refers to the ratio of the high quality liquid assets to net cash outflow. As such, LCR shall be calculated separately with respect to total (TL and foreign currency) liquidity coverage and foreign currency liquidity coverage. Pursuant to the LC Regulation, consolidated and unconsolidated total LCRs and the consolidated and unconsolidated foreign currency LCRs shall not be less than 100% and 80%, respectively.
The NSFR does not exist under the Turkish banking legislation currently in effect; however, the BRSA has issued a draft regulation on the determination and calculation of NSFR and introduction of ‘required stable funding ratio’ (“RSFR”) for banks, in January 2018. As per the draft regulation, assets and liabilities of banks are classified in different groups based on their risk weights and be subjected to different rates to be taken into consideration in the calculation of NSFR and RSFR. Although the draft regulation sets out that it will take effect as of January 1, 2018, the draft regulation has yet to be enacted by the BRSA.
Do banks have to publish their financial statements? Is there interim reporting and, if so, in which intervals?
Banks shall publish their annual consolidated and non-consolidated year-end financial statements in the Official Gazette by the end of April and submit the same to the BRSA pursuant to the Banking Law and the Regulation on Principles and Procedures of Accounting Practices of Banks and of Retention of Documents in Banks (the “Accounting Regulation”).
Additionally, banks shall make available at their websites their year-end and interim period financial statements, for a period of five years; and publish their annual activity reports at their respective websites by the end of May following the relevant financial period as per the Regulation on the Principles and Procedures concerning the Preparation of the Annual Report by Banks.
Also note that Turkish banking associations shall make available at their respective websites the year-end financial statements and interim period financial statements of banks.
Moreover, pursuant to the Accounting Regulation, Turkish banks shall submit their (i) unconsolidated interim financial reports to the BRSA and Turkish banking associations within 45 days as of the end of each quarter of the respective year and (ii) consolidated interim financial reports within 75 days as of the end of each quarter of the respective year, both in an electronic and printed form. In addition to quarterly reporting requirements, banks are also required to submit to the BRSA copy of their balance sheets and income statements within 30 days as of the end of each month.
Furthermore, pursuant to the Communiqué No. II-14.1 issued by the CMB, banks conducting capital markets activities shall publicly disclose their financial statements at the Public Disclosure Platform (Kamuyu Aydınlatma Platformu).
Does consolidated supervision of a bank exist in your jurisdiction? If so, what are the consequences?
In line with the Basel requirements to ensure quantitative consolidated supervision of banks, Banking Law and the secondary legislation issued thereunder require consolidated supervision of banks. Consolidated supervision is required when:
(i) the relevant bank is the parent; or
(ii) the relevant bank is not the parent; but is part of a group the parent of which is a bank or financial holding company incorporated in Turkey.
Pursuant to the Banking Law, the local and foreign subsidiaries, branches and facility offices of a parent bank and any institutions being controlled together with a bank are subject to consolidated supervision and audit of the BRSA. The consolidated supervision extends to the overview of the transactions between the relevant bank and the institutions subject to consolidated supervision together with such bank as per the statutory limits (credit and specific limits pertaining to certain transaction types, such as donations) stipulated for the respective risk group consisting of the relevant bank and the entities subject to consolidated supervision therewith and their internal systems including internal control, audit and risk management units. Turkish banking legislation also requires that the capital adequacy ratios, leverage ratios and liquidity coverage ratios be calculated separately on a consolidated and unconsolidated basis.
Consolidated supervision of banks also envisages certain accounting and reporting requirements to be undertaken by the relevant bank and the entities subject to consolidated supervision together with such bank. Pursuant to the Communiqué on Preparation of Consolidated Financial Statements by Banks, banks shall prepare consolidated financial statements incorporating data related to (i) their subsidiaries or affiliates qualified as credit or financial institutions, including insurance companies, institutions engaged in capital market activities, development and investment banks and financial holding companies, at the end of each quarter and (ii) all of their subsidiaries or affiliates regardless of whether these are qualified as credit or financial institutions, on an annual and semi-annual basis.
What reporting and/or approval requirements apply to the acquisition of shareholdings in, or control of, banks?
Acquisition of a bank’s shares that result in the direct or indirect holding of the shares representing 10% or more of the respective bank’s capital is subject to the permission of the BRSB. Additionally, if the shares directly or indirectly held by a single shareholder exceed 10%, 20%, 33% or 50% of the capital as a result of an acquisition, or the shares directly or indirectly held by a single shareholder falls below the abovementioned percentages as a result of a share transfer, BRSB’s prior permission is required.
In addition, transfer of a bank’s preferential shares comprising the privilege of nominating member(s) to the board of directors is also subject to the BRSB's permission irrespective of the percentage of the share acquisition/transfer.
Note that as a condition to obtaining BRSB’s permission, the acquirer of the respective shares shall deposit a transfer fee equal to 1% of the nominal value of the shares to be acquired, with the SDIF.
With respect to the acquisition of shares (whether preferential or ordinary) of publicly held banks through the stock exchange, pursuant to the Permission Regulation, BRSB’s permission shall be obtained in order for the acquirer to use the shareholder rights (other than the right to dividend) vested in the acquired shares. Additionally, in the event that the parent of a publicly held entity, holding the shares representing 10% or more of the capital of a bank, changes due to a share acquisition through the stock exchange, such legal entity shall obtain the permission of the BRSB in order to use the shareholder rights (other than the right to dividend) vested in the shares of the relevant bank held by such entity.
Does your regulatory regime impose conditions for eligible owners of banks (e.g., with respect to major participations)?
In addition to the information provided under Question 17, shares (i) representing directly or indirectly 10% or more of the bank’s share capital or voting rights or (ii) comprising the privilege of nominating member(s) to the board of directors correspond to the bank’s qualified shares (the “Qualified Shares”) and holders of the Qualified Shares (the “Qualified Shareholders”) shall satisfy the criteria required for the banks’ founders as set forth under Article 8 of the Banking Law. Accordingly, a Qualified Shareholder shall:
- not have (i) gone bankrupt, (ii) declared concordat , (iii) an approval for the restructuring application through reconciliation or (iv) been granted with a decision of postponement of bankruptcy; in accordance with the Execution and Bankruptcy Law (Law No. 2004);
- not hold any Qualified Shares or controlling shares in banks operation licenses of which have been revoked or which have been transferred to the SDIF;
- not hold any Qualified Shares or controlling shares in (i) bankers and financial institutions subject to liquidation, (ii) development and investment banks operation licenses of which have been revoked; or (iii)credit institutions shareholding rights (other than dividends), management and audit of which have been transferred to the SDIF or permits and authorizations to conduct banking transactions and to accept deposits and participation funds have been revoked prior to occurrence of such events;
- even if amnestied, and except for negligent offences; not have (i) been sentenced to (a) imprisonment for more than 5 years for any crime under the abolished Turkish Criminal Code (Law No. 765); or (b) imprisonment for more than 3 years pursuant to the Turkish Criminal Code (Law No. 5237 or (ii) committed any white collar crimes listed under Article 8 of the Banking Law;
- have necessary financial strength and reputation;
- possess honesty and competence required for job;
- in case of a legal entity, have a transparent and clear shareholding structure together with its risk group.
Are there specific restrictions on foreign shareholdings in banks?
There is no restriction under Turkish banking legislation on foreign shareholdings in Turkish banks.
Furthermore, the Permission Regulation sets forth further documentation for the applications made to the BRSB in case of a share transfer as per Article 18 of the Banking Law; if the acquirer of the respective bank’s shares is a bank or financial institution incorporated outside Turkey.
Is there a special regime for domestic and/or globally systemically important banks?
The Regulation on Systemically Important Banks (the “SIB Regulation”) sets forth the criteria for the determination of systemically important domestic banks (the “SIBs”) and such determination shall be made on an indicator based measurement approach comprising of the indicators reflecting the (i) size; (ii) interconnectedness; (iii) complexity; and (iv) substitutability of a bank. The calculation pertaining to the systemic importance of a bank shall be based on the consolidated financial data belonging to the previous year and be re-calculated each year.
Pursuant to the SIB Regulation, SIBs shall maintain a ‘SIB buffer’ to be calculated based on the ratios set forth under the SIB Regulation, for a period of 1 year following the determination of such banks as a SIB. Furthermore, SIBs are subject to additional core capital requirements to be determined based on the SIB buffer ratios (and the risk weighted assets on a consolidated basis) in addition to the additional core capital requirements set forth under the CM Regulation.
The SIB Regulation envisages different SIB buffer ratios applicable to each group of SIBs. As such, SIB buffer ratios are determined as (i) 1% for the 1st group, (ii) 1.5% for the 2nd group; (iii) 2% for the 3rd group and (iv) 3% for the additional 4th group to be established if need be.
What are the sanctions the regulator(s) can order in the case of a violation of banking regulations?
The BRSA is entitled, with a wide discretion, to impose certain measures and sanctions on a bank if, following the audits conducted on such bank on a consolidated or unconsolidated basis, it is determined that one of the circumstances listed under the Banking Law has arisen with respect to such bank:
(i) the liabilities of the bank are likely to exceed its assets or the bank does not comply with the liquidity requirements;
(ii) the profitability of the bank is not sufficient to reliably perform its activities due to the impaired balance between its income and expenses;
(iii) the equity capital of the bank is or is likely to be inadequate pursuant to the capital adequacy requirements;
(iv) the quality of the assets of the bank has deteriorated in a manner to weaken its financial condition;
(v) the bank is determined to have decisions, transactions or operations contradictory to the Banking Law, the secondary legislation or decisions issued by the BRSA thereunder;
(vi) the bank fails to establish internal systems units in an efficient and sufficient manner; or
(vii) the improvident management of the bank causes a material increase in the risk exposure or causes such risks to intensify in a significant degree to weaken its financial status.
The measures stipulated under the Banking Law are remedial, reformatory or restrictive, depending on the financial status of the respective bank and include, amongst others, (i) temporary suspension of distribution of the profits and transfer of such profits to the reserves, (ii) increase liquidity by selling off assets, (iii) restriction or prohibition on new investments or credit transactions, (iv) restriction on payment of fees and other types of payments to third parties and etc.
Furthermore, the BRSA is entitled to revoke the operation license of a bank or to transfer the management and audit of a bank to the SDIF, if:
(i) such bank fails to implement the measures imposed by the BRSA in a timely manner;
(ii) the financial condition of such bank is not recovered despite the implementation of the measures and sanctions imposed by the BRSA;
(iii) the BRSA is of the view that the financial status of the respective bank will not improve even if certain measures and sanctions are
(iv) the respective bank cannot fulfill its liabilities when such liabilities are due or the total amount of the liabilities of such bank exceeds the total amount of its assets.
What is the resolution regime for banks?
In addition to and parallel with the information provided under Question 21, the BRSA may, upon fulfilment of certain criteria, (a) revoke the operation license or (b) transfer the management and audit of a bank (the “Distressed Bank”) to the SDIF and the SDIF would fulfill the necessary operations for financial restructuring or the bankruptcy and liquidation of the same.
A. In Case of Revocation of Operation License
Following the publication in the Official Gazette of the BRSB’s decision on transfer the Distressed Bank’s management and audit to the SDIF, any execution and bankruptcy proceeding initiated against the Distressed Bank shall be stayed and no further execution or bankruptcy proceedings shall be initiated against the same. Upon stay of execution and bankruptcy proceedings, the SDIF will make the payments of the insured deposits and participation funds first and shall request from the relevant court to declare the Distressed Bank bankrupt and the respective court shall decide on the bankruptcy of the Distressed Bank within 6 months. In case that the respective court decides on the bankruptcy, claims of the SDIF against the bankrupt bank shall be preferred. If the respective court does not declare the Distressed Bank bankrupt, voluntary liquidation of the Distressed Bank shall be performed without being subject to the liquidation procedures provided for the joint stock companies (anonim şirket) under the Turkish Commercial Code.
B. In Case of Transfer of the Management and Audit
The SDIF shall be entitled to:
(i) cease the Distressed Bank’s operations temporarily; and/or
(ii) transfer assets and liabilities of the Distressed Bank to another bank in part or in full; and to request from the BRSB to revoke the Distressed Bank’s operation license; or
(iii) provide financial aid to the Distressed Bank by acquiring its shares and by purchasing damages corresponding to such acquired shares; or
(iv) to acquire the remainder of the Distressed Bank’s shares by paying the share price to the Distressed Bank’s shareholders; or
(v) to request from the BRSB to revoke the Distressed Bank’s operation license.
If majority or all of the shares of the Distressed Bank is transferred to the SDIF as per (iii) and/or (iv) above, the SDIF shall be entitled:
(i) for providing financial and technical aid to (a) transfer the Distressed Bank’s assets and liabilities in part or in full to another bank; or (b) merge the Distressed Bank with an existing bank willing to merge with the Distressed Bank; or
(ii) for the purposes of strengthening and restructuring the Distressed Bank’s financial structure and limited to the cases where it is deemed necessary by the SDIF; to
- increase the Distressed Bank’s capital;
- revoke punitive interests arising from mandatory reserve and general liquidity requirements;
- purchase the Distressed Bank’s subsidiaries, real estate and other assets or to pay advance payments in return of taking the same as collateral;
- make deposits for the purpose of satisfying the Distressed Bank’s liquidity needs;
- acquire the Distressed Bank’s receivables or damages;
- perform any transaction in relation to the Distressed Bank’s assets and liabilities and to convert the same into cash; or
(iii) to sell the Distressed Bank’s assets on a discounted or another basis to third parties and take all measures it deems necessary; and
(iv) to transfer the Distressed Bank’s shares to third parties upon approval of the BRSB.
In case that the above-mentioned act and/or transactions cannot be completed within 9 months (which can be extended for 3 more months by the Board of SDIF), the BRSB shall revoke the operation license of the Distressed Bank upon the request of the SDIF.
How are client’s assets and cash deposits protected?
According to the Banking Law, (i) savings deposits and (ii) participation funds owned by real persons deposited with deposit and participation banks shall be insured by the SDIF. As such, pursuant to the Regulation on Deposits and Participation Funds Subject to Insurance and Premiums to be Collected by the Savings Deposit Insurance Fund, for each real person, an amount up to TL 100,000 held in the savings deposit and participation accounts shall be insured, whether in TL, foreign currency or precious metal, provided that such accounts are (i) opened in the name of a real person, (ii) maintained with a Turkish branch of the credit institution operating in Turkey and (iii) not subject to any commercial transactions other than cheque issuance. The SDIF shall pay the parts of deposits and participation funds subject to insurance and maintained with banks of which operation licenses are revoked, from its own resources, to the extent that such accounts are authenticated without raising any doubt.
Certain excessive interest/profit share amounts (compared to the average interest/profit share amounts) in such accounts shall not be subject to the insurance; regardless of the above-mentioned limits. Additionally, certain deposits, participation funds and other accounts (i.e. accounts (i) owned by the respective credit institution’s controlling shareholders and top-level management, (ii) which comprise of proceeds of crime; and (iii) maintained with credit institutions incorporated in Turkey only to conduct offshore banking activities) shall be excluded from the insurance coverage.
Furthermore, as per Article 82 of the Capital Market Law, if it is determined that an investment institution (a) is unable to fulfil its (i) cash payment or (ii) capital market instruments delivery obligations arising from its capital markets activities or (b) will not be able to fulfil the same within a short period of time, the CMB shall decide to compensate investors upon the BRSA’s opinion to that regard as a pre-requisite. Investors shall apply to the Investor Compensation Center with the documents evidencing their right of ownership over the cash and capital market instruments held by the respective investment institution as Article 84 of the Capital Markets Law and the maximum compensation amount to be paid to each investor shall be TL 177,681.
Does your jurisdiction know a bail-in tool in bank resolution and which liabilities are covered?
The concept of Bail-in is regulated under Turkish law slightly different than the EU. As explained in detail under Question 22, the SDIF is entitled to take any and all measures in relation to Distressed Banks, the management and audit of which is transferred to it with the focus on to ensure cost efficiency and preserve the trust in the financial system and stability of the same including but without limitation to increase the share capital or perform any transaction in relation to the Distressed Bank’s assets and liabilities and to convert the same into cash for the purposes of strengthening and restructuring the Distressed Bank’s financial structure.
Parallel with the SDIF’s exceptional powers in bank resolution, the legal framework enacted by the BRSA in line with the Basel III compliance process also allows for one of the most well-known and preferred capital boosting methods utilized globally by the financial institutions: liability conversion into capital. As such debt instruments, premiums and loans (“Subordinated Liabilities”) fulfilling certain conditions set forth under the Regulation on Own Funds of Banks can be included in the calculation of Additional Tier I and Tier II capital of banks, as the case may be, upon the approval of the BRSA following the respective application by the board of directors of banks.
Subordinated Liabilities shall meet the following conditions in order to be qualified as Additional Tier I or Tier II capital:
(i) Debt instruments shall be issued by the respective bank, registered with the CMB and fees shall be collected in full and cash;
(ii) Initial maturity shall be at least 5 years, and there shall not be any principal repayment within the first 5 years or any repayment option before the end of maturity;
(iii) There shall not be more than one repayment option before the end of maturity, and if there is a repayment option before the end of maturity, such repayment option shall be exercised before 5 years as of the execution of the agreement and is subject to the consent of and approval by BRSA;
(iv) lenders or investors shall accept that they will repaid before the share certificates and primary subordinated loans, but after all other debts and loans, in the case of liquidation of the respective bank;
(v) There shall not be any association with any derivative instrument and contract so as to lead to breach of the condition specified in sub-paragraph (iii) or such items shall not be directly or indirectly secured by any means or in any manner; and
(vi) It shall be clearly specified in writing that such items shall not to be assignable or transferred to the affiliates and subsidiaries of the bank.
The BRSA would require some additional conditions to be met in order to grant approval for the treatment of such Subordinated Liabilities as Additional Tier I or Tier II capital and such conditions vary depending on the respective capital type requested to be supported by way of such treatment.
As a side benefit of capital boosting through the use of Subordinated Liabilities, banks may also increase their lending limits by elevating their Additional Tier I or Tier II capitals to facilitate the lending activities and consequently, profit generation. Recent data on Turkish financial sector reveal that there is an increasing tendency in the use of Subordinated Liabilities for these purposes.
Is there a requirement for banks to hold gone concern capital (“TLAC”)?
Banks in Turkey are required to hold gone concern capital in line with the Basel III as per the Regulation on Own Funds. The total capital of a bank is categorized as (i) Tier I Capital comprising of (a) Core Capital (corresponding to Common Equity Tier I capital under Basel III) and (b) Additional Tier I Capital and (ii) Tier II Capital.
Tier II Capital is calculated by the deduction of the deduction items listed under Article 9 of the Regulation on Own Funds from the sum of:
(i) General reserves calculated for the receivables for which the Standardized Approach is used for the determination of the principal credit risk amount as per the CM Regulation (it should, however, be noted that this item will no longer be taken into account as of January 1, 2020);
(ii) The positive amount determined as a result of the calculation set forth in the second paragraph of Article 8 of the Communiqué on Calculation of Credit Risk Weighted Assets based on Internal Ratings-Based Approach; and
(iii) debt instruments and subordinated loans which are approved by the BRSA following an application from the board of directors of the respective bank together with their written statement declaring that the respective debt instruments and issuance premiums thereof or the subordinated loans bear the conditions listed under the Regulation on Own Funds to be considered under Tier II capital.
Note that the conditions listed under the Regulation on Own Funds for the debt instruments or subordinated loans to be categorized as Tier II Capital are in line with the Basel III requirements on the same.
In your view, what are the recent trends in bank regulation in your jurisdiction?
In line with the ongoing efforts to render the Turkish banking legislation compliant with the Basel requirements within the last decade, the BRSA continues to reflect the Basel requirements in local banking legislation by enacting new regulations or amending the currently in-effect legislation in order to harmonize the Turkish banking system with international banking standards and trends. The BRSA is expected to continue its efforts to implement increasingly stricter regimes in the Turkish banking sector to increase the profitability of Turkish banks and reduce the risks that the same may encounter with the aim of establishing a stronger banking system. Although the draft regulation on the determination and calculation of NSFR is available on the official website of the BRSA since January 2018, for such purposes, and the BASEL III requirements within this respect have entered into force as of January 2018; the BRSA has yet to enact the relevant draft regulation.
In addition, one of the main focus points of the recently enacted banking regulations is the protection of financial consumers. The BRSA strictly regulates the terms and conditions of the financial products and services (especially regarding consumer loans, vehicle loans and housing finance loans) to be extended to consumers by Turkish banks and the fees and expenses to be charged in relation to financial transactions conducted by consumers, with a view to protect the financial consumers against unjust banking practices that have been imposed on financial consumers through contractual terms of the financial agreements concluded between Turkish banks and financial consumers.
Moreover, the Turkish foreign exchange legislation has seen piecemeal and significant amendments over the past year. As such, the Decree No. 32 has been amended with a view to re-regulate ability of Turkish residents to obtain foreign currency loans. In parallel with the amendments introduced to the Decree No. 32, the Capital Movements Circular dated January 2, 2002 has been abrogated in its entirety and has been replaced by the CBRT with the Capital Movements Circular dated May 2, 2018 (the “Capital Movements Circular”). Accordingly, Turkish residents are no longer able to utilize foreign currency indexed loans from abroad or within Turkey. Also note that Turkish resident individuals are prohibited from obtaining foreign currency denominated loans from abroad or within Turkey; however, Turkish resident legal entities with foreign currency income (i.e. income generated from export, transit trade, sales and deliveries deemed as export, foreign exchange generating services and transactions, as determined under the relevant legislation) may obtain foreign currency loans from abroad or within Turkey. Nevertheless, Turkish companies which do not have foreign currency income may still obtain foreign currency denominated loans; provided that such company and/or the respective loan fall within the scope of exemptions listed under the Decree No. 32 and the Capital Movements Circular.
Furthermore, upon the BRSA’s recently adopted conservative approach, there is a restrictive trend in the factoring sector with respect to cross-border factoring transactions to be conducted between foreign factoring institutions and Turkish residents. Although the BRSA’s approach has not been clearly reflected in the relevant legislation and is implemented through administrative letters issued by the BRSA, the restrictions on cross-border factoring transactions and the licensing requirement thereunder have made a significant impact on the ongoing supplier financing programs conducted between non-Turkish resident factoring institutions and Turkish residents. It should, however, be noted that due to the BRSA’s restrictive approach on supplier finance programs, foreign banks and financial institutions have recently tended to conduct draft purchase programs.
What do you believe to be the biggest threat to the success of the financial sector in your jurisdiction?
In the recent times, we have witnessed a series of crucial changes in the Turkish foreign exchange legislation, aiming to keep Turkish markets unaffected from exchange rate fluctuations, these have also given rise to uncertainties and complications in the market practice. Accordingly, all these changes and amendments have given an impression to potential and existing market players that financial markets in Turkey may be open to any unexpected developments.
Furthermore, in efforts to regulate financial restructuring opportunity for Turkish companies which are in financial distress and which have entered into credit transactions with Turkish financial institutions, Turkish regulatory authorities have introduced the Regulation on Restructuring of Debts owed to Financial Sector (the “Financial Restructuring Regulation”). Enactment of the Financial Restructuring Regulation has been followed by the execution of the financial restructuring framework agreement (the “Framework Agreement”) dated September 11, 2018 between Turkish banks and other financial institutions. Additionally, a draft law on restructuring of debts owed to financial sector has been prepared by the BRSA and distributed by the Banks Association of Turkey to its members in September 2018; however, the relevant draft law has yet to be enacted.
As per the recent amendments to the Financial Restructuring Regulation, foreign credit institutions and international organizations are now able to become a party to the Framework Agreement provided that their participation in the financial restructuring process initiated by any of their respective debtors cannot be subject to approval quorum and consent of Turkish financial institutions. It should, however, be noted that there is not any mechanism under the current legislative framework which provides for a public announcement of debtors applying for financial restructuring opportunity. As such, even though foreign currency indebtedness of Turkish real sector is intended to be brought under control and ameliorated by way of debtor-friendly changes in laws and regulations, this might discourage potential participants of Turkish financial sector.
In conclusion, preventive measures taken by lawmakers and regulatory authorities in Turkey have helped to control the distress relating to the exchange rate fluctuations and beforehand averted any recessionary trend and instabilities in Turkish economy. However considering that recentness and significance of the above-mentioned legislative measures and changes, it is important not to discourage potential investors since the Turkish market is an attractive market for risk appetite investors.