The Evolution of Turkish banking system (1980-2003) and the restructuring of the banking system after the financial crises in 1999-2001

Abstract

In this study, the evolution of Turkish banking system is analyzed and it is focused on the effects of the liberalization put into practice after 1980s and especially on the banking system in a general framework. With the structural reform program in 1980s, the transformation from a highly regulated inward-looking economy model to liberal economy model and the deregulations which were brought by this model and its consequences is analyzed. The reasons of the changing bank ownership from regional size to national scale are investigated. As a result of all these developments, in the deregulation environment, the ways of the capital transfer and accumulation in the Turkish banking system is listed. With the IMF’ 1999 stand by agreement, which cause the accelerations of the deterioration in banking system that have already some structural weaknesses, such as an inadequate capital base, a small and fragmented banking structure, the dominance of state banks in the total banking sector, weak asset quality such as concentrated credits, back-to back credits, group holding banking and a mismatch between loans and deposits (maturity mismatch), extreme exposure and aggressive risk taking appetite, FX open position, inadequate internal control systems, inadequate risk management and lack of transparency are examined. In this framework, Demirbank which is seen as the trigger of the November 2000 liquidity crises is examined in detailed way. The weakness of the balance sheet of the bank and the developments that brings transfer decision of the banks to SDIF is also analyzed. Finally, the regulations and the restructuring efforts to create a strong banking system after the latest experienced banking crises between 1999-2001 period is studied. The research was based on the reports and balance sheets of the banks between 1978-2001 period, some of the scientific researches aimed to understand the nature of the systemic and non systemic crises, working paper series, conference papers, publications and reports of financial and non-governmental organizations and the books in finance and economics and banking regarding the financial crises. This study concludes that before opening a country’s doors to foreign capital and liberalization, proper regulations and supervising are the key issues for the efficient functioning of the financial system. In the deregulation environment, the Turkish banking system as a whole had structural weaknesses so it was not possible to avoid from the financial and banking crises experienced in 1999-2001 period.