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    The debate on the reorganization of the BRSA and the CBT

    Fatih Özatay, PhD11 February 2012 - Okunma Sayısı: 945

    My recommendation was either to transfer certain powers of the BRSA to the CBT or unite the two agencies.

    I have been receiving comments on my recommendation on a new institutional regulation as stated in the conclusion of the search for a new monetary policy series. The institutional recommendation I put forth was that in order to secure that the monetary policy safeguards financial stability, either the Banking Regulation and Supervision Agency (BRSA) shall transfer certain powers to the Central Bank of Turkey (CBT), or the BRSA and the CBT shall be united.

    I addressed on Tuesday the comments of Mr. Baha Karabudak. He mainly argued that we needed the BRSA and similar other agencies in order to minimize the problems (as the banking crisis of Turkey) resulting from imbalances generated by the information asymmetry between the principle and the agent. He stressed that it would be incorrect to associate the presence of such sector regulators solely with the conjuncture and in this context claimed that a solution that offers the transference of the powers of a sector regulator about the credit market to the CBT did not seem feasible given the main objective of the BRSA was defined as maintaining confidence and stability throughout financial markets, ensure the effective operation of the credit system and protect the rights and interests of depositors.

    Coordination suggested

    Ms. Bilin Neyaptı from Bilkent University Department of Economics briefly said: “I completely agree with Mr. Karabudak. The presence of independent institutions (as anticipated) as the BRSA is of key importance in order for effective operation of ever-complex financial markets. I believe that integrating the banking regulation and supervision activities into central banks – particularly when it is questionable to what degree they are independent – will harm transparency and accountability.” Instead, she recommends a coordination mechanism.

    Also, I received a quite long letter from Mr. Mahmut Kutlukaya, banking expert at the BRSA. I want to summarize his views after stressing that these are his personal views and do not represent that of the BRSA: “...The reserve requirements set by the CBT and the loan provisions set by the BRSA are highly different in terms of their objectives. The main objective of the latter is to finance the potential loss which might arise within the course of banking activities and to cushion unexpected capital losses. Therefore, the goal of the loan provisions is to ensure that banks will have a stock to offset their loss under normal market circumstances. Also, it is probable that the expected rate of non-performing loans as a ratio to total loan volume differs depending on the phase of economic cycle.

    For example, in periods of economic overheating, the probability of default of loans might increase in parallel with the rise in risk appetite whereas in periods where the economy is drawn to recession, risk appetite falls and therefore the risk of default eases down. Therefore, it will be useful to calibrate the loan provisions with this perspective and set the provisions at a level that will offset the anticipated long-term losses.

    I believe that delinking the loan provisions from this dynamic underlying context would bring about some negative consequences in the long-term. For example, in the case of a prolonged recession which stemmed from the real sector, reducing the loan provisions substantially during the first phase of the recession might lead to failure of banks to finance their loss in the following phases. This might in turn trigger a new shock orientated at the financial sector. As a result, I think that it would be more useful to make a new definition and stock for provisions for macro-prudential policy tools out of the loan provision mechanism in order to achieve a mechanism like that you addressed in your studies.”

     

    This commentary was published in Radikal daily on 11.02.2012

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