1. TURKISH BANKING CRISIS AND THE PUBLIC BANKS TURKISH BANKING CRISIS AND THE PUBLIC BANKS

2. The stabilisation program aimed to improve the macroeconomic balances: December 1999 2 Beginning Of the Stabilization program

3. 3 Beginning Of the Stabilization program Declining Interest Rates Positive sentiment following the implementation of the economic program caused a rapid decline in interest rates

4. 4 Beginning Of the Stabilization program Widening System Declining Interest Rates However fiscal discipline was insufficient

5. 5 Beginning Of the Stabilization program Widening System Declining Interest Rates Increasing Foreign Trade Deficit Positive sentiment facilitated short-term borrowing

6. 6 Beginning Of the Stabilization program Widening System Declining Interest Rates Increasing Foreign Trade Deficit Structural Reforms Delayed Also, Political support for the programme was insufficient  Social Security  Agriculturel Support  Privatisation  Bank Supervision  Public Banks Restructuring  Tax Collection Reforms delayed

7. 7 Beginning Of the Stabilization program Widening System Declining Interest Rates Increasing Foreign Trade Deficit Structural Reforms Delayed Mounting Balance Sheet Instabilities Rating agencies and analysts began writing negative comments  Open positions increased  Maturity mismatch rose  Interest rate risk increased Foreign banks started to sell their portfolio via derivative instruments Result: Liquidity Squeeze Foreign investors began to leave the market due to increasing instability and negative comments

8. 8 1st Crisis 1. Crisis: It started as a liquidity crisis Beginning Of the Stabilization program Widening System Declining Interest Rates Increasing Foreign Trade Deficit Structural Reforms Delayed Mounting Balance Sheet Instabilities Overnight funding rates increased to 1,700% There was still no liquidity

9. 9 Liquidity crisis turned into a banking sector crisis Banking sector restructuring 1st Crisis Beginning Of the Stabilization program Widening System Declining Interest Rates Increasing Foreign Trade Deficit Structural Reforms Delayed Mounting Balance Sheet Instabilities  Park Yatırım  Demirbank Which could not manage their liquidity, were taken over by the SDIF.  Etibank  Bankkapital The Banks,

10. 10 However, nothing changed in public banks;  No action to solve subsidies problem  No effective balance sheet management  No liquidity management It became clear that the success of the stabilization program depended on the restructuring of the public banks. Banking sector restructuring

11. 11 Banking sector restructuring 2nd Crisis 1st Crisis Beginning Of the Stabilization program Widening System Declining Interest Rates Increasing Foreign Trade Deficit Structural Reforms Delayed Mounting Balance Sheet Instabilities State Banks caused the second crisis

12. 12 15-Dec-9915-Mar-0015-Dec-0028-Feb-01 Private Banks (deposit interest rates %) 714158107 Public Banks (deposit interest rates %) 794670130 Interest Rate Differential 851223 Interest rate differential of public banks began to distort the financial system 2nd Crisis

13. 13 Banking sector restructuring 2nd Crisis 1st Crisis Restructuring the Public Banks Beginning Of the Stabilization program Widening System Declining Interest Rates Increasing Foreign Trade Deficit Structural Reforms Delayed Mounting Balance Sheet Instabilities No option of slow progress was left in the Public Banks restructuring Two Strategic Targets 1.Financial Restructuring 2.Operational Restructuring

14. 14 1.Reduction in interest rates differential 2.No more short-term debts 3.More transparent balance sheets Priority targets in financial restructuring Restructuring the Public Banks

15. 15 First target: Rate Differential Restructuring the Public Banks

16. Second target: Short-term debts ( Trillion TL ) 16 Restructuring the Public Banks

17. 17 1.Right sizing 2.Technological improvements 3.Reengineering the processes 4.Redefining the controls Priority targets for operational restructuring Restructuring the Public Banks