I believe that Ankara played to the crowds. I do not understand the meaning of the decision.

I want to talk about two decisions made about the banking sector, the first by the Competition Authority of Turkey, based in Ankara, and the second by the government of Southern Cyprus. The Competition Authority of Turkey fined banks for their violation of competition rules. The government of Southern Cyprus, upon the European Union’s demands, decided that depositors would share the cost of the national banking crisis. I believe that Ankara played to the crowds. I do not understand the meaning of the decision. On the other hand, Nicosia made a tough call and I can see why. Let me tell you what I think.

First, let me state a few observations about the banking sector. The job of a bank is to invest someone else’s money. The bank shoulders the entire risks during this process. Third, it has to pay its depositors the promised return, even if it makes a loss. Fourth, the state introduces a series of measures in order to limit the risk banks undertake while investing the depositors’ money. Regulations on reserve requirements and capital adequacy serve this purpose. Fifth, if a bank goes bankrupt despite all measures, the savings deposit insurance steps in. Sixth, the banking sector is not subject to price competition, which would distort the sector. Otherwise, the by definition bad bank would grow would grow and push out the good bank. Seventh, it is among the duties of the public banking regulation authority to make sure that banks do not diverge from market-protecting concerted action when setting transaction and mediation fees.

Now let me put emphasis on two issues: I did not understand the purpose of the Competition Authority’s decision. Since price competition is by definition irrelevant to the banking sector, the Authority cannot investigate for a concerted action. The Banking Regulation and Supervision Agency (BRSA) and the Central Bank of Turkey (CBT) are obliged to ensure that banks are not in any kind of concerted action when setting prices. If a bank that dominates the credit card market, for instance, establishes an e-commerce company and uses customer spending profiles to monopolize, we can talk about a violation of competition. The Competition Authority must be interested in actions of this kind. From this perspective, the latest decision was a mistake.

On the other hand, Nicosia’s decision makes sense to me. In economic terms, this decision verifies how deep the crisis is in Southern Cyprus. Cypriot banks have extended loans worth eight times the GDP of the country. This rate in Turkey is smaller than 100 percent. Fund inflows from Russia were transferred to Greek enterprises as loans. The Greek economy shrank by 20 percent in the last four years. Because of non-performing loans, bank assets fell short of covering liabilities. Banks have adverse balances. There are four options to counter this: The first is to ask the banks' owners to invest additional capital. But trying to find someone to invest in an already bankrupt enterprise is more difficult than pulling teeth. Second, the state can invest capital and balance assets with liabilities, but this requires public resources. Third, a part of the banks’ liabilities before depositors might be canceled. Last, the state can take over the bank and the savings deposit insurance fund steps in.

The European Union has for the first time intervened directly in a banking crisis in the Cyprus case. Instead of managing the situation by injecting liquidity as they always have, it asked the local depositors to pay their share in the loss. I think the fact that Southern Cyprus is a money laundering heaven for Russia played a role in the Union’s decision. They were not willing to save Greek depositors. Therefore, unlike Ankara’s, you can technically understand the purpose of Nicosia’s decision.

Of course, understanding the decision does not necessarily mean approving of it. But Ankara’s decision is not even understandable, let alone approvable. I am wondering what the BRSA and the CBT think about the Competition Authority’s ruling.

This commentary was published in Radikal daily on 19.03.2013