Cablegate: Turkish Regulators On Takeover of Uzan's Bank And

Published: Fri 11 Jul 2003 03:32 PM
This record is a partial extract of the original cable. The full text of the original cable is not available.
E.O. 12958: N/A
REF: A. (A) ANKARA 4061
B. (B) ANKARA 4026
C. (C) ANKARA 3784
1. (SBU) Summary: Turkish banking regulatory authorities
say their July 3-4 decision to take over management (and
revoke the license) of Uzan family-owned Imar Bank was the
result of a severe bank liquidity squeeze, which was prompted
by the government's earlier revocation of the family's energy
concessions in southern Turkey. Bank regulators seized
management control -- but not ownership -- and plan to
liquidate the bank, paying off depositors but leaving other
liabilities to the bank owners to cover. Energy market
regulators say they were behind the government's June 12
decision to revoke the concession agreements of Cukurova
Electrik and Kepez, based on the companies' failure to
transfer their electricity transmission assets to the state,
as well as numerous other contractual violations. End
2. (SBU) As reported in ref A, the GOT on June 12 announced
that it had annulled the concession agreements of Cukurova
Elektrik and Kepez, both owned by the infamous Uzan family,
to operate eleven dams and a 5,000 kilometer energy
transmission grid in southern Turkey. Energy Market
Regulatory Authority (EMRA) President Yusuf Gunay told us
that he had pressed the government for several weeks to take
this step in rsponse to the companies' failure to comply with
various legal, regulatory, and contractual obligations.
3. (SBU) According to Gunay, the main problem was the
companies' refusal to transfer their transmission assets to
the state, as required by the Electricity Law. Gunay
explained that, while the original concessions authorized the
companies to operate transmission facilities, the subsequent
Electricty Law prohibited private operation of such
facilities. As the concession agreement required the
companies to conform with any future legislative changes,
Gunay said, the Uzans had no legal basis to say "no" to the
GOT. Moreover, per Gunay, the companies consistently ignored
EMRA's pricing policies, failed to allow full third-party
access to the grid, and failed to provide reliable service to
industrial groups (notably the Sabanci Group).
4. (SBU) On July 3-4, the Banking Regulation and Supervision
Agency (BRSA) announced that it was revoking the license of
Imar Bank, also owned by the Uzan family, and that it would
take over management in order to liquidate the bank. BRSA
Vice President Teoman Kerman explained the decision to us on
July 11, as follows:
-- Until June 12, BRSA had no major problems with the bank.
Although its group lending exceeded the legal limit (25
percent of net worth), the owners had injected additional
capital and were complying with a BRSA-imposed timetable to
reduce group lending to the legal limit. (Note: Kerman
explained that, under Turkish law, banks have a transition
period until end-2006 to reach the 25 percent limit, unless
the group lending poses a threat to their viability before
that date. In the case of Imar Bank, BRSA's assessment was
that the group lending was not an imminent threat.)
-- After the government's June 12 revocation of the power
concession agreements, BRSA grew concerned about the bank's
viability. The electricity companies not only contributed
significantly to the Uzan Group's profitability, but also
were key sources of liquidity for the bank. When depositors
began withdrawing funds after June 12, the bank lacked the
liquidity to meet the demand. Bank management sought help
from the BRSA, which legally could not help, and from the
Central Bank, which refused to inject liquidity because the
bank lacked collateral.
-- On or about July 1, the bank management resigned en masse,
after having paid out some TL 150 trillion (just over $100
million dollars) to depositors. The owners called for a
General Assembly to select a new management team, but BRSA
determined that the bank's precarious state required
immediate action. Kerman could not recall the exact
chronology (and BRSA's announcement is unclear), but on July
3-4, BRSA revoked the bank's license, and transferred
management to the Savings Deposit Insurance Fund (SDIF).
-- Unlike in previous takeovers, SDIF took over management
control but not ownership of the bank, and also is
guaranteeing only deposits rather than providing a blanket
guarantee for all liabilities. Kerman explained that, in
previous bank takevoers, the banks in question had a negative
net worth, so SDIF had taken ownership and continued to
operate the bank. Imar Bank, however, had a positive net
worth of some TL 180 trillion. Under Turkish law, if SDIF
takes over a bank with a positive net worth, it must pay that
net worth to the owners. Moreover, nearly all of Imar Bank's
non-desposit liabilities were owed to the Uzan Group, and the
SDIF would also have had to pay those liabilities. Given
these special circumstances, regulators determined that it
would be less expensive to the government not to take
ownership, but to seize management control, pay off
depositors, and liquidate the bank.
-- As a result, the bank has stopped operating, and SDIF is
preparing to cover all outstanding deposits (once it gains
access to account information). It will take over and seek
to liquidate the banks assets -- mostly loans to Uzan Group
companies -- by requiring borrowers to repay the loans over a
schedule to be negotiated.
5. (SBU) Kerman insisted that BRSA's decision to take over
the bank was based purely on the financial merits, and that
there had been no political pressure of any kind. He
estimated that the Uzan Group would have the financial
wherewithal to repay most if not all of the loans owed to the
bank, so the net cost to the Treasury of the takeover should
be small. In the worst-case scenario, involving SDIF being
unable to liquidate any of the bank's assets, the total cost
to Treasury would equal the bank's deposits of TL 800
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