April 30, 2018

IMF published its staff report in the context of the 2018 Article IV consultation with Turkey. Financial sector policies should aim to strengthen the oversight and governance of the banking sector, where progress has been limited on the recommendations of the Financial Sector Assessment Program (FSAP). Progress in implementing the 2017 FSAP recommendations in bank supervision and regulation is uneven and could be stepped up. Specifically, the independence of the Banking Regulatory and Supervision Agency (BRSA) and the quality of nonperforming loan (NPL) data could be strengthened, loan restructuring activity fully could be accounted for, and bank loan classifications and bank governance standards could be further strengthened.

The staff report reveals that the bank capital levels remain high, although some buffers are decreasing. Higher profits improved capital adequacy in 2017, reflecting in part the relaxation of prudential norms and the conservation of capital through the use of state loan guarantees. Since the end of 2016, the system-wide tier 1 capital adequacy ratio has increased by one percentage point to 14.1%. Capital adequacy levels were further strengthened with tier 2 bond issuance. The headline NPL ratio remains low at 3%. However, a broader definition of impaired loans—including restructured credits, “watch list” loans, and NPLs sold to third parties—amounts to nearly 8% of all loans, signaling emerging loan quality weakness. This is especially a concern in consumer credit and small- and medium-size enterprise loans, while signs of distress have also emerged in some larger corporate groups.

The staff recommends that macro-prudential policies should be revisited in areas where vulnerabilities are highest, specifically the highly leveraged corporate sector. Macro-prudential tools should be used to build buffers and contain systemic financial vulnerabilities. Such tools should focus on risks rather than demand management and, as such, some aspects of the post-2015 relaxation of the macro-prudential regime could be revisited, particularly for the corporate sector where bank exposure has grown significantly and vulnerabilities are high. The report also highlights that the implementation of IFRS 9 started in January 2018. Also, new credit classifications and provisioning rules, more in line with the international standards, came into force. Furthermore, a revision of the regulation on internal systems of insurance, reinsurance, and pension companies and other related regulations is being prepared. A qualitative supervisory assessment tool is being developed to assess risk management and internal control systems of insurers.

 

Related Link: Staff Report

Keywords: Europe, Turkey, Banking, Insurance, Article IV, FSAP, Macro-prudential Policy, NPLs, IFRS 9, IMF

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