Regulation, once an unfortunate afterthought, has become a topic for debate at dinner tables around the world. Light touch regulation has fallen out of favour and looks set to be replaced by a more intrusive, tougher form of oversight – of which the Capital Markets Board of Turkey has long been a proponent. What does Turkey’s regulator have to teach the rest of the world? Solomon Teague finds out.
Turkish financial institutions have nothing but good things to say about their regulator, but it has not always been so. Some institutions felt the zealousness of the regulation in Turkey kept them out of profitable businesses in which they were keen to participate. Such opinions are unheard of now: the regulator is acknowledged as having played a significant role in protecting the Turkish banking sector from the excesses of the last 10 years, contributing to its relative health today.
With US and European regulators wrestling with questions about how best to regulate their financial industries, does Turkey provide a model the rest of the world ought to be copying?
Many think so. At the very least, the US and other jurisdictions should be engaging emerging markets in discussions about how to regulate the banks. After all, they have had more experience of dealing with financial crises.
The IMF deserves some credit for the regulatory environment in Turkey. The conditions that were attached to the IMF package after the 2001 crisis set the stage for the strict oversight that has prevailed since a decade of decadence in the 1990s, when there was practically “no regulation at all”, according to Gunduz Findikcioglu, chief economist and head of research and investor relations at Turkiye Sinai Kalkinma Bankasi in Istanbul.
A decade of profligate financial expansion fuelled a crisis, leading to a clampdown and strict regulation, which in turn facilitated a period of sustainable, responsible growth: it is an appealing story for those that have seen the first two elements of the equation played out in their own financial markets, for example the US and UK.
“Tough regulation is not a problem for the banking industry. It is so sensitive. You need a strong, external regulator. Reliance on internal controls is not enough,” said Tolga Egemen, head of corporate banking at Garanti Bank. It is a mark of the severity of the last 12 months that such sentiments are unlikely to meet much opposition. This is in stark contrast to the principle underlying the most successful markets in the period leading up to the summer of 2007.
The principles that formed the basis of Turkish regulation over that period – strict limits on leverage and higher capital reserves – suddenly look more appealing to the rest of the world. The Turkish regulator loved asking questions, said Emre Yigit, director of research at Global Securities. It was good at seeking to understand what the banks were doing.
Others argue that Turkish banks merely had a simple business model, which involved collecting deposits and making loans to corporates – close to the romanticised ideal of banking that Western publics have come to crave. In that sense the Turkish regulator had an easier job than those of other countries, where institutions were keener to push the limits in the hunt for profits.
Yigit agrees with some of that sentiment. “Turkish regulation was no better than what you saw abroad,” he said, arguing that Turkish banks’ conservatism was a direct result of their experiences in 2001, and not because of something imposed on them from above.
“If we had seen those same levels of liquidity for a year or two longer, maybe we’d have been drawn in [to excessive lending],” he said. As it was, institutions did not need to look at these businesses because “returns on vanilla products were good”.
The Turkish public has lived through more crises and seen more market volatility than many of its counterparts in the Western world. Consequently, in Turkey the global crisis has not caused the same level of panic, which has made its negative effects there more muted, also helping to make life easier for the regulator.
The good news is that this will naturally replicate itself in the West, where institutions are already shying away from risk – so much so that economies would benefit from banks taking on a little more. The experience of this crisis is likely to reverberate for years, so regulators will not have the same volume of highly complex structures to worry about for the foreseeable future.
But regulators must ensure measures designed to tackle the problems do not cause new ones. Yigit dismissed risk weighting, part of the Basel II regime that governed the global banking industry, as “a recipe for disaster”.
Against this benchmark the Turkish system of additional capital requirements and frequent regulatory reviews has the advantage of simplicity, even if it lacks the flexibility. It certainly does a better job of limiting risk, Yigit said. Unfortunately it is doubtful whether such simplicity can be applied to the far larger economies of the West.