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New Regulation on Prevention Plans for Systemic Banks

Legal Alerts
Banking & Finance
General

Recent Development

The Law No. 7222 (the “Law“), published in the Official Gazette on February 25, 2020 and entered into force on the same date introduced amendments to the Banking Law No. 5411 (the “Banking Law“) with a view to introducing new tools to modernize Turkish banking laws through strengthened sectoral security and adaptation to changing conditions.

You can find our Legal Alert dated February 25, 2020 on the amendments introduced with the Law here.

One of the key amendments was the introduction of prevention plans to increase the effectiveness of oversight and supervision processes and accelerate the decision-making and implementation processes for banks determined as systematically important by the Banking Regulatory and Supervisory Authority (the “BRSA“). With this new mechanism, systemically important banks are required to prepare prevention plans after determining any potential issues that might arise in their financial structures and their estimated response measures. They must submit the prepared prevention plans to the BRSA. Article 66/A of the Banking Law introduces prevention plans and authorizes the BRSA to determine the procedures and principles regarding the preparation of prevention plans. Accordingly, the BRSA issued the Regulation on Prevention Plans for Systemically Important Banks (the “Regulation“), which was published in the Official Gazette on March 16, 2021 and entered into force on the same date.

What Does the Regulation Say? 

The Regulation was published to regulate the procedures and principles regarding prevention plans.

Features and Content of Prevention Plans

Article 4 of the Regulation regulates the considerations while preparing prevention plans and appears to be a “brief drafting guide”.

The Regulation requires banks to incorporate certain information into the prevention plans. These are referred to as the mandatory “minimum content” of prevention plans and are listed in Article 5 of the Regulation. The following provisions of the Regulation further elaborate each item in the minimum content list and their scopes.

In addition to the above, the term “important legal person” is defined and elaborated in Article 8 of the Regulation. Accordingly, if a legal person within the organization of a bank subject to the prevention plan requirement is classified as an important legal person in accordance with this Article, the bank must also provide certain information about the important legal in the prevention plan.

Prevention Plan Scenarios

Given that the validity and applicability of prevention plan measures may change under different stress conditions, the Regulation regulates that the adequacy, effectiveness, impact and applicability of prevention plans are tested within the framework of action plan scenarios.

The Regulation sets forth three mandatory scenarios, namely, systemic scenario, bank-specific scenario and combined scenario. Banks must consider in their prevention plan scenarios: (i) systemic events that may have negative consequences on the financial system or real economy; (ii) events specific to the bank that may have negative consequences for the bank; and (iii) a combination of systemic and bank-specific events that occur simultaneously and interactively.

Besides the abovementioned minimum mandatory scenarios, the number and content of scenarios may vary depending on the business model, size, funding model of the bank and its connections with other institutions and the financial system. In addition, each scenario must take the bank’s vulnerabilities and weaknesses into account.

Prevention Plan Indicators

To determine when banks must take the response measures outlined in their prevention, the BRSA adopts an indicator mechanism. Accordingly, banks determine quantitative and qualitative indicators and thresholds related to these indicators. The thresholds indicate the stage at which the decision regarding the implementation of a response measure will be made.

To prepare the prevention plan indicators and related thresholds, the BRSA published an attachment to the Regulation that includes the minimum content for indicators. The following provisions of the Regulation further elaborate each item in the attached document.

In accordance with Article 22/7 of the Regulation, these indicators and thresholds must be revised at least once a year and when and if required.

Notification Requirement

Banks must prepare prevention plans in accordance with the Regulation as of each year-end and submitted to the BRSA by the end of March of the following year.

If an event which requires an amendment to the prevention plan occurs, the prevention plan has to be updated and submitted to the BRSA immediately.

In the event that the thresholds for the indicators are exceeded or about to be exceeded in a near future, this event and the reasons for the occurrence of the event, together with the response measures taken or to be taken, must be immediately reported to the BRSA.

Conclusion

The Regulation sets forth the procedures and general principles for the newly introduced prevention plan requirement.