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Certain things cannot be tackled by yelling
We are violently angry at banks. Mr. Rifat Hisarcıklıoğlu, President of Union of Chambers and Commodity Exchanges (TOBB), has been angry at them. Recently, Honorable Prime Minister of Republic of Turkey also started to express his anger for banks. Life is hard for banks. Have you noticed that, in fact we are angry at banks just because they act like banks? Nowadays, we request banks not to act like banks. But they continue acting like banks. Then, is it possible to change the behavior patterns of banks? Of course it is possible. To do this, it is necessary to take public measures that will change the meaning of acting "like a bank". Today, let us first touch upon the existing structural problems. Then, let us explain how the government can change the behavioral patterns of banks by implementing measures. So that, everyone will see clearly the role he/she must fulfill and our energy is not wasted.
Why is everyone angry at banks? The answer is hidden in the graph below. Banks have been rearranging their portfolios since October 2008. While they reduce the share of bank credits transferred to the corporate sector, they increase the share of government debt securities (GDS). This way, banks try to access more liquidity like everyone does in the current crisis environment. Just as the corporate sector primarily tries to deplete product inventories in crisis periods, banking sector tries to reduce credit portfolios. This is the first outcome. Of course, if data is examined in more detail, it is observed that doing this is harder for banks who know how to extend credits and have big portfolios. But the outcome does not change anyway. And this is the second point. Again as the data suggests, it is observed that public banks have been trying to increase the volume of consumer loans over the last couple of months. Let us record this as the third point. The conclusion to be drawn from here, which will also be the fourth point of the day, is: Banks do not extend credits to companies but lend to the Treasury. The Treasury, which is quite content with this interest, makes more borrowing day by day. Therefore, the public sector does not seem unhappy about the current behavioral pattern of the banking sector. Fifth point is obvious: If banks steeply reduce the level of credits extended to the corporate sector, contraction in the economic activities will hit back balance sheets of banks through non-performing loans. Banks become the victim of the movement they have initiated. Therefore, banks must not be left alone in acting like banks. Here, the government must assume a certain role.
Share of GDS and credit portfolios in bank assets (%, December'04 - February'09)
So, why do banks act like this? Global crisis affects the corporate sector in negative direction. As they cannot differentiate good companies from bad ones and as they do not know when the crisis period will end, banks naturally absent themselves from corporate sector. That banks are offering high-interest credits to the corporate sector while the liquidity facilities provided for them is increasing and cost are falling down is not because they seek exaggerated profits but because they are not willing to extend credits as a whole. Those high interest rates in fact show that banks are not willing to extend credits. What else do you expect given that the course of the economy is changing? Banks are acting like experienced traders. In a period where "anything can happen anytime", they are trying to keep liquid assets, "enhance their maneuverability" and assume another position quickly when necessary. It is acting like a bank not to extend loans to the corporate sector as it is going under structural change. And it is normal.
Nonetheless, this behavioral pattern is normal if the rules of the game are not intervened in. nowadays, the world and Turkey is going through an abnormal period. A period where European Central Bank, following the FED, finances short-term liquidity needs of the corporate sector is not a normal ordinary period. In such period, banks must not be expected to stop acting like banks alone and direct their efforts to preserve the production capacity of the country. What must be done is to design an incentive system that will convince banks to preserve the production capacity of the economy and support corporate sector. The way to do this is somehow to share/socialize the risks banks will take over this period. Only the public sector can convince banks to take risks. The government, by taking measures, can ensure that banking sector supports corporate sector. What is more, government can accomplish this using the market mechanism.
So, what are the measures that have not been yet implemented but the government can implement to convince banks to extend credit to the corporate sector? Instead of explaining the measures at length, let us list the four main types of measures and their meanings. First is strengthening the loan guarantee mechanism we have been discussing for six months. This way, both existing credits received by the corporate sector can be restructured and expanded in maturity, and new credit can be extended. The issue here is that public sector directly warrants for a certain part of the extended loans. Second, a system geared to support the banking sector with capital and loans when necessary might be designed to ensure that banks feel more secure. Third, Central Bank use the system to provide liquidity to the banks in parallel with the level of credits extended by individual banks. What does it mean? It means that the bank that extends highest level of credits accesses cheapest liquidity in the easiest way. Currently, the system works in the opposite way. Fourth, government must provide the banking sector with a way-out strategy and pave their way. In fact, this refers to a new economic program.
The conclusion is obvious: Government must implement measures for banks to increase the level of credits extended to the corporate sector.
Certain things cannot be tackled by yelling.
This commentary was published in Referans daily on 12.05.2009