February 4, 2015

Unlawful intervention in Bank Asya to backfire on markets, experts warn

A midnight police raid on the headquarters of Turkey's largest Islamic bank after a banking watchdog's decision to take over the bank's management on Tuesday lacks legal grounds and will likely stir further speculation in financial markets, pundits warned on Wednesday.

The Turkish banking watchdog on Tuesday handed management control of 63 percent of the privileged shares of Turkey's Bank Asya over to state savings funds, citing insufficient transparency to allow for proper regulation. Bank Asya management and shareholders, however, denied the existence of transparency flaws and said the decision was a government-orchestrated bid to sink the lender.

The bank vowed to take legal action in response to Tuesday's decision. Economists highlighted on Wednesday that intervention in the bank's board can only be temporary, because the bank cannot technically be seized unless depositors withdraw their money from Bank Asya.

On Wednesday, the main share index Borsa İstanbul (BIST) fell 1.4 percent, with bank shares traded on the bourse down 2.2 percent. The Turkish lira lost more than 1.6 percent in value against the US dollar following the Bank Asya reports, reversing earlier gains after the central bank on Tuesday decided not to hold an early policy meeting to cut rates.

The intervention in Bank Asya comes on the heels of an alleged personal effort by President Recep Tayyip Erdoğan to scuttle the bank through defamatory news about the bank in pro-government media and separate regulatory restrictions. Erdoğan has, on several occasions, made defamatory remarks about the bank, accusing it of failing to manage its funds and even once claiming that the bank had gone bankrupt. With one of the best capital adequacy ratios in the sector, Bank Asya has rejected such assertions. Turkey considers it a crime to defame a bank in a way that may damage its prestige or cause a loss of confidence in it. The government had earlier warned that it could intervene to assign board members in publicly traded companies “to protect the interests of investors.”

Erdoğan is claimed to have personally encouraged private and state-owned firms and institutions to withdraw their cash from Bank Asya earlier in 2014. No bank in Turkey other than Bank Asya has been subject to such intense pressure over the past 14 months, observers asserted. The government canceled tax collection and social security payment contracts with Bank Asya in August.

Back in October, Reuters cited a source with knowledge of the situation as saying that Erdoğan, who was traveling when large withdrawals of deposits from Bank Asya began last year “wanted Bank Asya's keys on his table when he came back.” “This bank has already failed," Erdoğan said at a conference in İstanbul in September. Investment analysts have expressed concern over the impact of the regulator's recent actions. The move by the regulators also prompted accusations of political meddling that could hurt Turkey's reputation with international investors. Experts also warned that Tuesday's politically motivated decision threatened to reverse the structural reforms implemented in the Turkish banking sector following the country's domestic financial crisis in 2001.

"This operation is very much linked to a personal grudge, and it goes down very badly with investor communities. Once this perception is spread, you can't change it," Global Source Partners economist Atilla Yeşilada said on Wednesday. Reactions from the European Union, foreign investors and international market experts confirmed a possible backlash on the Turkish finance industry. “It seems to be an alarming extension of the state's authority into the private sector and it is likely to reinforce concerns about increasing authoritarianism under President Erdoğan,” William Jackson, economist at the London-based Capital Economics Ltd, told Today's Zaman on Wednesday.

“Growing authoritarianism could reverse a trend of strong and stable growth in Turkey,” Jackson added. Maja Kocijancic, in the European Commission's department for Enlargement and European Neighborhood Policy, spoke to Today's Zaman on Wednesday, saying: “The key question in such cases is the proportionality and reasoning for such a takeover. The [European] Commission will look in more detail at the case in question.”

Selin Sayek Böke, deputy chairman of the main opposition Republican People's Party (CHP), said the move was a "scandal." "The destruction of hard-won institutional respectability and credibility for political goals is wrecking the reputation, power and future of Turkey's economy," Böke said in a statement on Wednesday.

Contradictory statements from gov't

Economy Minister Nihat Zeybekci said on Wednesday that Bank Asya had been taken over due to capital inadequacy issues; however, the Banking Regulation and Supervision Agency (BDDK) cited structural problems as the justification for the takeover of the board. Observers recalled on Wednesday that the latest independent audit report of Bank Asya -- conducted by Ernst & Young -- did not mention structural irregularities but only a decrease in profits.

Recalling that the BDDK's excuse for changing the Bank Asya board was the lack of documents from some of the bank's controlling shareholders, economist Uğur Gürses told Today's Zaman that the Savings Deposit Insurance Fund (TMSF) must return the board to former executives once the documents are presented. A similar intervention in a privately run bank in Turkey happened back in July 2011 when the TMSF took a 62.37 percent stake in Arab Turkish Bank (A&T Bank) from the Libyan Foreign Bank (LFB). The TMSF returned the shares to the bank after the required documents were provided in March 2012.

Bank Asya said on Wednesday that its operations would not be affected and also named a new nine-member management board in a separate statement to the BIST. TMSF Deputy Chairman Mehmet Ali İslamoğlu was appointed to replace Bank Asya CEO Ahmet Beyaz in Wednesday's decision. İslamoğlu is known for his close ties with Erdoğan.

Some economists have said that the operation targeting Bank Asya could negatively affect foreign investors in Turkey. Speaking to Today's Zaman, Elvan Aktaş from Valdosta State University in the US said such an operation can only be seen in dictatorships and third-world countries. "Even when a bank sinks under normal circumstances, this indicates that the state failed in its inspections. If you make a bank sink, financial balances are ruined. Those who invest with bank credit will have to pay much more interest. The ruling party supporters will also be affected negatively," Aktaş said.

Bank Asya vows legal fight, says will continue operations

Beyaz, who was among the nine members of the bank's executive board removed by the TMSF, said late on Tuesday that the bank will take legal action against the move, which he also says will not affect the bank's operations.

Speaking live on Samanyolu TV about Tuesday's decision by the BDDK to order the TMSF to take control of Bank Asya's board, Beyaz said the bank has been subjected to a “lynch campaign” and unlawful actions for a year, with the TMSF action being the latest example. Beyaz said TMSF officials arrived at the bank's headquarters on Tuesday night with a large group of police officers, which he said was a move to intimidate people and create an impression that the bank is engaged in wrongdoing. “There is nothing illegal going on here [at the bank]. This is a bank; everything is recorded,” he said. He underlined that the bank had not been “seized,” as claimed by pro-government media outlets, because the bank has neither liquidity nor capital problems. “None of our shareholders' stocks has been seized. The TMSF will simply use the executive rights of some shareholders [board members] on their behalf. The TMSF also removed nine board members, including me, and appointed new members,” he said.

Stressing that the TMSF action is problematic in legal terms, Beyaz said Bank Asya shareholders will file legal cases against the BDDK, the Capital Markets Board (SPK) and media outlets running false reports on Bank Asya. “Those who are involved in this lawlessness will pay the price for this. We believe that these cases will be concluded as befits a democratic state of law,” he added. Beyaz thanked the Bank Asya customers who had lent support to the bank in the face of intimidation by the government and told them not to be concerned over the latest TMSF action.

“With God's permission, nothing will happen to Bank Asya as long as our customers continue to stand by us. This is what we believe,” he added. Bank Asya, founded by sympathizers of Turkish Islamic scholar Fethullah Gülen, saw depositors -- including state-owned firms and institutions --withdraw funds last year in what it described as a systematic campaign to undermine it. Early on Wednesday, loyal Bank Asya clients flocked to branches across Turkey to shore up the Islamic lender with new deposits. Bank Asya had more than 1 million deposit-holding customers ahead of Tuesday's intervention and this figure is expected to have spiked. Bank Asya's capital adequacy ratio stood at 17.35 percent as of June 2014, one of the highest in the sector, and above the Turkish banking sector's average of 16.3 percent. This figure surged to 18.32 percent on Wednesday, bank sources said.

The same sources added that Bank Asya has one of the strongest capital structures in Turkish finance industry and insisted that it will survive.

Published on Today's Zaman, 04 February 2015, Wednesday