As part of Turkey’s ongoing program to incorporate Basel III rules into its banking laws and regulations, on February 23, 2016, the Turkish Banking Regulation and Supervision Authority (the “BRSA“) enacted the Regulation on Systemically Important Banks in an effort to impose stricter requirements for banks operating in Turkey whose failure might trigger a financial crisis. This follows the BRSA’s adoption of comprehensive Basel III regulations on October 23, 2015 and January 20, 2016.
The Financial Stability Board, established by the G20 nations, has published a list of global systemically important banks (“G-SIBs“) since from November 2011 (see 2015 list here), in an attempt to minimize systemic risks to financial markets following the global financial crisis of 2007 and 2008. As a complementary policy tool, the Basel Committee published its Framework for Dealing with Domestic Systemically Important Banks (“D-SIBs“) for banks whose distress could trigger a domestic or regional financial crisis due to interconnectedness and spillover effects. Within this framework, the BRSA adopted this new regulation to ensure overall economic stability through macro-prudential supervision of Turkish financial markets.
What the regulation says
• The BRSA will adopt an indicator-based approach to identify D-SIBs in Turkey, where the BRSA will assess the banks’ (i) size, (ii) interconnectedness, (iii) complexity, and (iv) substitutability.
• Systemic importance will be calculated annually based on the ratio of a bank’s systemic importance to the weighted average of the Turkish banking sector’s systemic importance score.
• The indicators for this assessment are set out in the matrix below:
|Size||Balance sheet assets||40%|
|Off-balance sheet transactions|
|Derivative financial instruments and credit derivatives|
|Securities financing transactions|
|Interconnectedness||Intra-financial system assets||20%|
|Intra-financial system liabilities|
|Complexity||Nominal value of over-the-counter derivatives||20%|
|Trading and available-for-sale securities|
|Substitutability||Assets under custody||20%|
• The BRSA will not take into account domestic “sentiments” (i.e., Turkey-specific indicators) such as loans and advances to households, unlike other jurisdictions such as Australia.
• If a bank’s systemic importance is above a certain threshold, the bank will be classified as a D-SIB. The BRSA has not yet determined the threshold, but is expected to do so in the near future.
• D-SIBs will be allocated initially into three groups based on their systemic importance scores, with progressively increasing requirements for additional loss absorbency. The regulation also provides for an initially unused group (Group 4), which is expected to be used for banks experiencing stress which the BRSA determines pose the greatest risk to the banking system. If the initial unused group is later used, a new unused group (Group 5) will be created to be used if further differentiation is needed among D-SIBs. Furthermore, the BRSA will have the discretion to amend the thresholds for groups or place a bank in a different group.
• The BRSA requires D-SIBs to sustain a systemic bank capital buffer for additional loss absorbency, in addition to the ordinary capital buffer. The systemic bank capital buffer will be a percentage of risk-weighted assets depending on the group to which a bank is assigned.
• The BRSA will phase in D-SIBs’ additional loss absorbency requirements until January 2019 in accordance with the ratios set out below:
|Group||Loss absorbency requirement (%)|
(common equity as a percentage of risk-weighted assets)
• The BRSA will make its initial group assignments of D-SIBs based on financial statements of December 2014; the D-SIBs must comply with the loss absorbency requirements for their group by March 31, 2016.
• Banks that fail to maintain the required capital buffers will be forced to limit dividends and submit a capital conservation plan to the BRSA.
The BRSA has demonstrated its commitment to a robust and resilient Turkish banking sector by increasing the compliance with the Basel III requirements. The additional measures for Turkey’s “too big to fail” banks address the potentially negative impact arising from the interconnectedness of the financial industry and the overall economy where a single bank’s failure could trigger a financial crisis. Furthermore, the moral hazard costs associated with direct or tacit support of governments, such as bail-outs, for D-SIBs are mitigated through the regulation. The tighter capital requirements, however, may have the unfortunate side-effect of triggering a contraction of available credit in the Turkish market.
Please contact us if you have questions about how these changes might affect your company.