RSF Turcia

CENTRAL BANK OF THE REPUBLIC OF TURKEY
Financial Stability
Report
MAY 2010
VOLUME:10
Head Office
İstiklâl Cad. 10 Ulus, 06100 Ankara, Türkiye
Tel: (90 312) 310 3646 (74 Lines)

Fax: (90 312) 310 2600
Telex: 44033 mbrt tr; 44031 mbdı tr
World Wide Web Home Page: http://www.tcmb.gov.tr
E-mail: bankacilik@tcmb.gov.tr, info@tcmb.gov.tr
ISSN 1306–1232
ISSN 1306–1240 (Electronic)
This report, which aims to inform the public, is based mainly on March 2010 data. However, the report also
includes the developments and evaluations until the publishing date of the report in Turkish. This text is fully
available at the CBRT web site. The CBRT cannot be held accountable for decisions taken based on the
information and data provided in this report.
FOREWORD
Thanks to the measures taken worldwide, the normalization process in the financial
markets started as of the second half of 2009 and global economic activity started to recover.
However, the high budget deficit problem, which manifested itself in some countries in the
form of a debt crisis in recent months, fuels concerns over the sustainability of economic
recovery and indicates that the global crisis is not completely over yet.
In Turkey, economic activity also started to recover in the last quarter of 2009 and domestic
demand assumed a steady climb. Nevertheless, persisting uncertainties in developed
economies, especially in European countries, constitute a risk factor for all developing
countries through external demand and foreign financing, and Turkey is no exception.
Unlike many other countries, the Turkish financial sector maintained its resilience
throughout the crisis and no capital support from public sector was resorted to. This is a
result of the steadfast implementation of structural reforms and regulations introduced in the
light of our past experience. Within this framework, policies to be implemented with the aim
of achieving the targets set forth in the Medium Term Program, and especially putting the
Fiscal Rule into practice are of crucial importance.
Studies for establishing the new rules and approach needed in order to maintain financial
stability on national and global levels are carried out by the G-20 with a view to averting
similar crises. Our country actively supports this process with all its relevant institutions and
endeavours to prevent the new global financial regulations from adversely affecting the
competitive power and growth potential of developing countries.
I hope that the Report, which evaluates the latest status of our financial system in the
context of global and domestic macroeconomic developments, will be beneficial for all
relevant parties.
Durmuş YILMAZ
Governor
.
CONTENTS
Contents i
Overview iii
I. Macroeconomic Developments 1
I.1. External Sector 1
I.1.1. International Developments 1
I.1.2. Balance of Payments 11
I.2. Growth and Inflation 15
I.3. Public Finance 19
I.4. Private Sector Developments 24
I.4.1. Household 24
I.4.2. Corporate Sector 32
I.4.2.1. Financial Debts of the Corporate Sector and
the Development of Foreign Exchange Position 32
I.4.2.2. Profitability and Debt Structures of the
Firms Listed on the ISE 35

II. Structure of the Financial Sector 39
II.1. Banking Sector 39
II.2. Banking Sector Profitability and Capital Adequacy 45
II.2.1. Profitability 45
II.2.2. Capital Adequacy 50
III. Banking Sector Risks 55

III.1. Credit Risk and Scenario Analysis 55
III.1.1. Credit Risk 55
III.1.2. Credit Risk Scenario Analysis 66
Financial Stability Report - May 2010

i
III.2. Market Risk and Scenario Analysis 67

III.2.1. Market Risk 67
III.2.2. Scenario Analysis 70
III.2.2.1. Interest Rate and Exchange Rate Increases 70
III.2.2.1.1. Depreciation of TL 71
III.2.2.1.2. Interest Rate Increases and Loss in Value 72
III.3. Liquidity Risk 73
III.4. Financial Strength Index 80
IV. Financial Infrastructure 85

IV.1. Turkish Interbank Clearing Real Time Gross Settlement
System (TIC-RTGS) and Electronic Securities Transfer
and Settlement System (TIC-ESTS) 85
IV.2. Cheque Clearing System 89
IV.3. Developments in the System of Card Payments 92

ii
OVERVIEW
The Global economy started to recover on the back of stimulus packages introduced by
governments and until recently, global growth estimates have continued to be revised upwards.
Nevertheless, the recovery is expected to be driven mainly by the developing Asian countries
and the US; and recovery in European countries is expected to be slower as they are struggling
with big budget deficits.
The optimism in international markets was marred by elevated concerns over debt sustainability
in some EU-member states. Risks pertaining to the sustainability of recovery without government
stimulus persist; measures taken are adversely affecting debt dynamics by distorting public
debt balances and these feed concerns over spillover effects. Within this framework, should the
mentioned risks materialize, a new credit squeeze might emerge in the financial system and exit
from the recession could be slower than expected worldwide.
In 2009, the Turkish economy contracted by a significant margin, mainly because of the
serious decrease in external demand due to the global crisis, along with the decline in both
domestic investments and in households’ consumption expenditures. Economic activity, which
plummeted in the last quarter of 2008 and the first quarter of 2009, started to recover as of
the second quarter of 2009, thanks to re-balancing monetary and fiscal measures. Meanwhile,
growth is mainly domestic demand-driven and acceleration in export performance has not yet
reached the desired level. The weak performance of external demand continues to restrain
economic activity and employment especially via the industrial sector. Even if the industrial
production index and capacity utilization rates display double-digit-growth in the first quarter of
2010, economic activity is expected to remain below the pre-crisis level until the third quarter.
Recent depreciation of the Euro due to the debt issues of European countries coupled with slow
recovery rates in the countries concerned are expected to curb external demand’s contribution
to growth. Accordingly, it is estimated that it would take some time for private investments to
reach pre-crisis levels because of persisting uncertainty in external demand.
Inflation displayed a rapid decline in 2009. Inflation, which climbed in the first few months
of 2010 due to price increments resulting from the tax adjustments covering fuel-oil products,
alcoholic beverages and tobacco products; the rally in unprocessed food prices and the low
base created by last year’s tax-cuts, is expected to assume a downward trend as temporary
factors taper off and come down to a level consistent with the target in the first few months of
2011.
The current account deficit, which rapidly narrowed as of the last quarter of 2008 due to the
slowdown in economic activity and decreasing energy prices, started to increase again as of the

iii
last quarter of 2009 with the rise in imports driven by increasing domestic demand fuelled by
the fading effects of the crisis. Meanwhile, growth in European countries is yet to accelerate and
as Europe is the most important trade partner of Turkey, exports of Turkey are adversely affected
and this has an expansionary impact on the current account deficit. Therefore, the current
account deficit in the upcoming period will be determined by Turkey’s export performance,
which is closely related to the recovery in European economies and by energy prices that
assumes an important place in Turkey’s imports.
The decline in indirect tax revenues along with the rise in non-interest expenditures stemming
from transfers made due to the slowdown in the Social Security Institution’s premium collections
led to a rise in budget deficit until the last quarter of 2009. In the following period, tax revenues,
which increased parallel to the recovery in the economy, contributed to the improvement in
budget balance. In a period when heated debates are going on pertaining to the high level
and sustainability of public debt of European countries, the fact that its ratio of public debt to
national income is lower compared to many developed countries is very important for Turkey.
Moreover, a significant step will have been taken towards sustainability of fiscal discipline once
the announced Draft Bill on Fiscal Rule is legislated.
Credit utilization of households, which decelerated as of the third quarter of 2008, started to
rise again as of the first quarter of 2009. Nevertheless, the household indebtedness in Turkey
is lower compared to many other countries and interest rate and exchange rate risk is limited.
The rise in unemployment led to a decline in debt servicing capacitiy of households and has
pushed up the non-performing loan ratio for consumer loans as of the last quarter of 2008.
However, the recent improvement in employment conditions and the downward trend observed
in the ratio of non-performing loans of households as of the last quarter of 2009 are regarded
as favorable developments.
While credit card balances increased throughout 2009, the ratio of balances that incurred
interest to credit card balances remained flat. However, recently, households’ utilization of
deposit accounts with overdraft facilities has increased and therefore the amount that turned
into credit on these accounts increased as well. Taking into account the fact that interest rates
incurred on such accounts are quite high compared to interest rates applicable to consumer
loans, it would be wise to remind consumers once more to refrain from using deposit accounts
with overdraft facilities except for their short-term cash requirements.
Although sales revenues of firms and their profitability declined due to the fall in aggregate
demand, exchange rate-driven financial expenses decreased owing to the appreciation of
the Turkish lira, and firms’ profitability performance increased in 2009. The upswing in sales
revenues of firms, which started as of the last quarter of 2009 on the back of the recovery in
economic activity is expected to continue in 2010 as well. Meanwhile, susceptibility of firms’
debt burden and profitability performance to exchange rate movements persists due to the
dollarization of firms’ liabilities and the high level of FX short position.
Parallel to the recovery in economic activity, corporate loans and especially loans extended
to Small and Medium-sized Enterprises (SMEs), started to climb as of the third quarter of 2009.
As a result of the amendment made to Decree No: 32, firms have decreased loans that they
use from abroad and have opted for domestic banks for FX loans. Meanwhile, the downward
trend in the non-performing loans of firms observed as of the third quarter of 2009 indicates a
recovery in the corporate sector’s debt servicing capacity.

iv
Acceleration in the rate of increase in the credit volume of the banking sector and the
improvement in asset quality is expected to continue in the upcoming period provided that the
recent recovery in economic activity and the normalization process in global financial markets
continue.
The main reason for the recovery in profitability performance of the banking sector in 2009
was that the net interest margins increased as a result of the maturity mismatch stemming from
the decline in policy rates. Despite the unfavorable impact of the contraction in interest rate
margins on profitability following the termination of the policy rate-cuts, the improvement in
asset quality is expected to foster the profitability performance of the sector, as was observed in
the first quarter of 2010.
In the period when the global crisis started to deepen, some timely and effective measures
towards Turkish lira and foreign exchange markets were taken and the tension and volatility in
markets were subdued to a great extent. Both the FX liquidity and the total liquidity adequacy
ratios of the Turkish banking sector have been well above the legal thresholds. In Turkey, the most
important funding source of the banking sector is deposits, and unlike many other countries, the
fact that loans can be entirely funded by deposits curbs the susceptibility of the banking sector to
the volatility of interbank funds and decreases the liquidity risk based on re-financing needs.
The banking sector continues its tendency to avoid exchange rate risk and balances its on-
balance sheet short position with an off-balance sheet long position.
The capital adequacy ratio of the sector, which is well above the legal minimum of 8 percent
and the target ratio of 12 percent, further increased in 2009 thanks to high profitability and the
rise in risk-free government securities investments. The mentioned ratio is expected to decrease
somewhat in 2010 as banks increase their loans. Compared to other countries, both the capital
adequacy ratio and capital quality are higher in Turkey. Unlike many other countries, the equity
capital of the banking sector in Turkey is composed of profit reserves and paid-up capital that
has a higher capacity of covering losses. The scenario analyses conducted reveal that the
capital structure of the banking sector is sound enough to cover losses that could emerge as a
result of various shocks.
The Financial Strength Index, which is monitored as an indicator of the soundness of the
banking sector, rose at the end of 2009 due to the rise in the capital adequacy, profitability and
interest rate risk indices, and maintained its favorable level in March 2010.
So far, the impact of the financial problems in Europe on the Turkish economy has been
limited. Nevertheless, unless these problems are taken under control in the upcoming period,
they will become the primary risk factor with respect to global financial stability. Should this risk
materialize, it would lead to the erosion of confidence in financial markets and interrupt the
global recovery process and Turkey would be adversely affected by such developments.

v

vi
I. MACROECONOMIC DEVELOPMENTS
In this chapter, macroeconomic developments will be explained, taking into account the
importance of such developments for financial stability.
I.1. External Sector
I.1.1. International Developments
The recovery that started in March 2009 on the back of the perceptions that the exit
process from crisis accelerated in financial markets, continued until the last few weeks when
concerns over debt sustainability of some EU countries led to sharp movements. The other
principal drivers of the recovery in question were the counter-cyclical monetary policies adopted
by central banks, the rising risk appetite and capital flows (Chart I.1). The future trend of the
markets will be determined by the developments pertaining to debt-sustainability of countries
and the reactions to the measures taken thereto.
Chart I.1.
Equity and Commodity Prices
MSCI Equity Price Indices S&P Goldman Sachs Commodity Price Indices
(01.01.2007=100) (01.01.2007=100)
160 160 250 250
140 140
200 200
120 120
100 100 150 150

80 80
60 60 100 100
40 40
50 50
20 20
0 0 0 0
05.10
03.07
06.07
09.07
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
05.10
03.07
06.07
09.07
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
Developed Countries Emerging Countries General Index Energy Sub-Index
Source: Bloomberg

1
Chart I.2.
CDS Indices in USA and Europe and US Volatility Index
USA (CDX) and Europe (ITRAXX) CDS Indices VIX Index
2000 2000 100 100
1800 1800
1600 1600 80 80
1400 1400
1200 1200
60 60
1000 1000
800 800
40 40
600 600
Average*
400 400
20 20
200 200
0 0
0 0
05.10
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
05.10
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
CDX ITRAXX
Source: Bloomberg (*) Average of March 2009-March 2010 period.
Boosted by increased optimism in the markets, the rise in asset prices and the decline
in volatility continued in the first few months of 2010 as well. In the same period, significant
increments were recorded in price/earning ratios and it was observed that financial markets
reflected expectations for a fast and strong recovery in prices. Accordingly, credit default swap
ratios, which denote the insurance premia that firms pay as a precaution against default risk,
decreased significantly too (Chart I.2). However, concerns over debt-sustainability of some EU-
countries fed the volatility in the markets (Chart I.2).
Chart I.3.
Growth Rates in Selected Countries (Annual percentage change)
Developed Countries and Regions Developing Countries and Regions
10 10 12 12
8 8 10 10
6 6 8 8
4 4 6 6
2 2 4 4
0 0 2 2
-2 -2 0 0
-4 -4 -2 -2
-6 -6 -4 -4
-8 -8 -6 -6
06 07 08 09 10* 11* 06 07 08 09 10* 11*

USA United Kingdom Turkey Middle and East Europe
Japan Euro Area Middle East and North Africa Emerging Asia
Source: IMF WEO

(*) Forecast (IMF, April 2010)
Developments in financial markets bolstered by the stimulus packages introduced

by governments had a favorable impact on aggregate demand and the real economy.
Indeed, global growth prospects for 2010 rose to 4.2 percent1. This rapid recovery is
expected to be driven by developing Asian countries and the USA; and growth in European
countries that are struggling with high budget deficits is expected to be slower (Chart I.3).
1 IMF World Economic Outlook, April 2010.

2
Chart I.4.
Unemployment and NPL Ratios (%)1
Unemployment Rates NPL Ratios
9 9 6 6
5 5
8 8
4 4
3 3
7 7
2 2
1 1
6 6
0 0
5 5
05 06 07 08 09*
USA Turkey
06 07 08 09 10* 11*
S. Africa Brazil
Hungary United Kingdom
Developed Countries Developing Countries
Source: IMF WEO and IMF GFSR, April 2010 (*) As of June, September and October for S. Africa, Brazil and Hungary,
(*) Forecast respectively.
Despite higher growth expectations and favorable financial market conditions, the risks
pertaining to global financial stability and the economy in general persist to a great extent.
The contribution of high growth expectations worldwide to reducing unemployment rates are
estimated to be limited especially in developed economies (Chart I.4). As this development can
affect the default rates of consumer loans in developed countries, it could lead to deterioration
in asset quality and continue to be a vulnerability factor for the global financial system.
Chart I.5.
Inflation Rates (CPI annual percentage change)
Developed Countries and Regions Developing Countries and Regions
4 4 15 15
3 3
12 12
2 2
9 9
1 1
6 6
0 0
3 3
-1 -1
-2 -2 0 0
06 07 08 09 10* 11* 06 07 08 09 10* 11*

USA United Kingdom Turkey Middle and East Europe
Japan Euro Area Emerging Asia Middle East and North Africa
Source: IMF WEO

(*) Forecast

3
Meanwhile, the recent recovery in global demand, the improvement in growth expectations
and the rise in risk appetite has influenced commodity prices too and the prices of many
commodities bounced back to September 2008-levels when the crisis hit the bottom (Chart
I.1). The surge in commodity prices and the likely price increments in oil prices in the upcoming
period might exert an upward pressure on general prices especially in oil-importing countries
(Chart I.5). It is highly possible that the number of European Union–member states struggling
with debt issues, like Greece, may increase and, hence, growth may become sluggish in the
Euro area in the upcoming period, which can curb upward movement in commodity prices.
Chart I.6.
Policy Rates in Selected Countries (%)
Developed Countries Developing Countries1
7 7 19 19
6 6 17 17
5 5 15 15
4 4 13 13
3 3 11 11
2 2 9 9
1 1 7 7
0 0 5 5
03.07
06.07
09.07
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
05.10
05.10
03.07
06.07
09.07
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
USA Euro Area S. Africa Turkey
United Kingdom Japan
Brazil Hungary
Source: National Central Banks

(1) Overnight borrowing rate has been used for Turkey.
In the light of these developments and taking into account the fact that economic recovery
is not yet at the desired level, it is estimated that developed economies would not move into
the rate-increase cycle for an extended period. However, it is observed that the normalization
process in monetary policies of developing countries, where the crisis was less destructive and
fiscal positions were stronger, has already started. Indeed, the central banks of some developing
countries such as India, Malaysia and Brazil have started to increase policy rates (Chart I.6).
Until recently, inflation rates, which had been heading downwards worldwide because of
contracted demand due to the global crisis, have enabled central banks to implement counter-
cyclical monetary policies by effectively using monetary policy instruments against the crisis.
Budget deficits and high indebtedness levels are expected to continue in countries that increased
public expenditures for the sake of boosting domestic demand in spite of declining tax revenues.
This, in return, will likely lead to banks’ crowding-out the private sector, firstly by keeping more
state securities in their portfolio and secondly by limiting credit sources. The still-low level of
real interest rates and a recovery that is not yet at the desired level in developed countries
decreases the chances of interest rates being increased in the short run, which, in turn, increase
the likelihood that the capital requirements of developed countries will not be adversely affected
by this “crowding-out effect” in the short and medium run.

4
Box 1.
The Fiscal Problems of the Countries in the Euro Area and the Possible Effects of These
Problems on the Banking Sector
Recent fiscal problems experienced in Greece have raised concerns about the debt
sustainability of other countries that also have high budget deficit and indebtedness ratios.
Especially, high budget deficits of the Euro Area countries, which are also called PIIGS, such as
Portugal, Ireland, Italy, Greece and Spain, have caused selling pressure on their government
bonds and as a result, their sovereign Credit Default Swap (CDS) spreads have increased
significantly (Chart I.7). These developments require rapid implementation of fiscal reforms in
these countries, which have not been able to achieve public savings and have had high budget
deficits for a long period of time (Table 1).
Table 1. The Primary Budget Surplus/Deficit (PBS) and Public Debt to GDP Ratios (%)
2006 2007 2008 2009
PBS Debt PBS Debt PBS Debt PBS Debt
Portugal -1.2 64.7 0.2 63.6 0.1 66.3 -6.6 76.8
Italy 1.3 106.5 3.5 103.5 2.5 106.1 -0.6 115.8
Ireland 4.0 24.9 1.2 25.0 -5.9 43.9 -12.2 64.0
Greece 0.6 97.8 -0.9 95.7 -3.1 99.2 -8.5 115.1
Spain 3.7 39.6 3.5 36.2 -2.5 39.7 -9.4 53.2
Source: Eurostat
The debt crisis of PIIGS countries threatens the entire European banking system. The size of
European banks’ exposures to these countries indicates that the problems in PIIGS countries
could be a serious threat to financial stability (Table 2).
Table 2. The Size of the Banks’ Exposures to PIIGS Countries in terms of Ownership
(Billion US dollar)
Financial Risk (As of the End of December 2009)
PIIGS/Affected Country Germany France England Europe
Portugal 47 45 24 241
Italy 190 511 77 1,033
Ireland 184 60 188 635
Greece 45 75 15 189
Spain 238 220 114 851
Total 704 911 418 2,949
1
Total Assets 9,862 9,048 11,070 52,857
The Percentage in the Total Assets (%) 7.1 10.1 3.8 5.6
Source: BIS
(1) The size of the total assets of Euro Area institutions, which grant loans, is as of year-end 2008.
The ratio of exposure to PIIGS countries to total assets have reached to 7.1% in Germany,
10.1% in France, 3.8% in England and 5.6% in the entire Europe in 2008. In May, with the
decision of Euro Area leaders, a financial support of 750 billion Euro is agreed to be used for
countries which may experience difficulties due to fiscal deterioration and precautions have
been taken for the possible threats such as extension of the debt problem and destabilizing of
the region and the Euro.

5
In the continental Europe, the fiscal discipline problems in the so-called PIIGS2 countries
have grown big enough to threaten the markets. As concerns grew over the spread of these
risks to other countries, the sale of both public and private securities rallied worldwide. In the
markets, the default risk perception for these countries grew bigger and led to sharp rises in the
interest rate of their treasury bills (Chart I.7). Due to this development, banks holding treasury
bills of these countries in their portfolios might need additional capital.
Chart I.7.
Government Bond Rates and CDS Ratios for PIIGS Countries
CDS Ratios for Turkey and PIIGS Countries
Government Bond Rates for PIIGS Countries (%)1 (Basis Points)
10 1000
9 900
8 800
7 700
6 600
5 500
4 400
3 300
2 200
1 100
0 0
01-09
02-09
03-09
04-09
05-09
06-09
07-09
08-09
09-09
10-09
11-09
12-09
01-10
02-10
03-10
04-10
05-10
01-09
02-09
03-09
04-09
05-09
06-09
07-09
08-09
09-09
10-09
11-09
12-09
01-10
02-10
03-10
04-10
05-10
Portugal Italy Ireland Portugal Italy Ireland
Greece Spain Greece Spain Turkey
Source: Bloomberg
(1) Spread between 10-year government bonds of countries that are used by the Bloomberg and the German government bonds of the same maturity.
Box 2. Measures Taken Against The Latest Developments in Europe

The impact of the global financial crisis that initially affected the U.S. and immediately
afterwards the Europe in 2008, have been less severe on European banks compared to the
U.S. banks. Though there are some views indicating that they are delayed, the measures
taken against the crisis have significantly contributed to eliminating unfavorable effects and
establishing promising market conditions.
However, rising public debt due to the actions taken during this process has caused concerns
about the indebtedness levels of the countries to prevail in markets. In addition, detection of
incorrect and misleading data in its statistics has attracted attention on Greece. Furthermore,
increasing concerns, which are affected by the downgrade in the country’s credit ratings below
the investment grade level, have led jumps in CDS spreads in early May. Due to these adverse
conditions, on May 8-9 2010, EU countries decided on a new package of measures.
Under the framework of the “European Financial Stability Mechanism”, the Economic and
Financial Affairs Council (ECOFIN) agreed on a fund of €500 billion, of which € 440 billion
comes from the Euro Zone countries whereas €60 billion is provided by emergency funds of
the European Commission. An additional €250 billion from the IMF is decided to be part of
this fund. The fund is raised to aid member states in extraordinary circumstances, which may
2 Portugual, Italy, Ireland, Greece and Spain.

6
happen beyond the control of the countries. Considering the contagion effects of the adverse
developments, tightening measures for the public debt and structural reforms in the European
region are agreed to be accelerated and in this framework, the measures taken by Spain and
Portugal are decided to be monitored. Moreover, fiscal consolidation and crisis resolution
efforts have been geared up among the EU countries and the proposed support to ECB for
stabilizing the Euro zone is confirmed.
Moreover, several major central banks decided to take some measures to eliminate the
negative impacts of the serious problems in the markets on the effectiveness of monetary policy.
In this regard, on May 10, 2010, the ECB decided;
• To conduct operations to sterilize excess liquidity due to the prospective interventions
within the context of “Securities Market Programme” that covers the Euro zone public
and private debt securities markets in order to eliminate the problems in the securities
market and to rebuild sound monetary transmission mechanism,
• To adopt a fixed-rate for all the regular 3-month longer-term refinancing operations
(LTROs) to be allotted on May 26 and June 30, 2010,
• To conduct a 6-month LTRO with full allotment on May 12, 2010, at a rate which will
be fixed at the average minimum bid rate of the main refinancing operations (MROs)
over the life of this operation,
• To reactivate the temporary liquidity swap lines with the Federal Reserve in coordination
with other central banks, and resume US dollar liquidity-providing operations at terms
of 7 and 84 days, where the first operation is set to be carried out on May 11, 2010
In response to the reemergence of strains in the US dollar short-term funding markets in
Europe, the temporary US dollar swap lines reestablished among Bank of Canada, Bank of
England, European Central Bank, Federal Reserve, Swiss National Bank and Bank of Japan.
Related to this temporary facility, similar to arrangements that were in place previously, Fed
will provide Bank of England and Swiss National Bank with the US dollars at fixed rates to be
supplied to their local markets. As for the arrangement with the Bank of Canada, drawings up
to $30 billion would be financed, as was the case before. These swap arrangements have been
authorized through January 2011.
Source: European Commission, ECB, Fed and Central Banks.
Meanwhile, yield curves have been steeper recently. This increases the countries’
debt burden as well as the banking sector’s risk of incurring loss because of their security
portfolios and also encourages short-term funding in the banks of developed countries.
Moreover, the reduced activity in securitization markets makes banks reluctant to extend
credits. Indeed, surveys regarding lending conditions reveal that even if the number
of banks with tight credit conditions has decreased, the tightness in credit conditions
during the crisis has been maintained and banks continue to be cautious (Chart I.8).

7
Chart I.8.
Credit Survey Results of US and European Banking Sectors (%)
Ratio of Banks That Have Tightened Lending Ratio of Banks That Have Shortened the Max.
Conditions in USA and Europe (%)1 Maturity of Loans in USA and Europe (%)2
80 80
70 70
60 60
50 50
40 40
30 30
20 20
10 10
0 0
-10 -10
-20 -20
01.08
04.08
07.08
10.08
01.09
04.09
07.09
10.09
01.10
04.10
01.08
04.08
07.08
10.08
01.09
04.09
07.09
10.09
01.10
04.10
USA Europe USA Europe
Source: Fed, ECB.

(1) The figures indicate net result generated by subtracting the ratio of the banks that have loosened lending conditions from the ratio of banks that have tightened lending conditions.
While a positive number denotes tightening, a negative number denotes loosening.
(2) The figures indicate net result generated by subtracting the ratio of banks that have loosened from the ratio of banks that have shortened the maximum maturity. While a positive number
denotes tightening, a negative number denotes loosening the credit conditions.
Low short-term interest rates, which are a result of measures taken by countries and are
expected to continue for a while, coupled with increased capital flows towards developing countries
due to the climbing risk appetite, lead to appreciation of national currencies; decline in risk premia
and a rise in asset prices in the countries in question (Chart I.9 and Chart I.1).
Chart I.9.
Exchange Rates and Risk Premia in Selected Developing Countries1
Value of National Currencies of Selected EMBI+

Countries in terms of USD
(27.02.2009 = 100)
120 120 900
800
110 110
700
100 100
600
90 90 500
400
80 80
300
70 70
200
60 60 100
08.08
09.08
10.08
11.08
12.08
01.09
02.09
03.09
04.09
05.09
06.09
07.09
08.09
09.09
10.09
11.09
12.09
01.10
02.10
03.10
04.10
05.10
08-08
09-08
10-08
11-08
12-08
01-09
02-09
03-09
04-09
05-09
06-09
07-09
08-09
09-09
10-09
11-09
12-09
01-10
02-10
03-10
04-10
05-10
S. Africa Turkey EMBI+ Brazil S. Africa

Brazil Hungary Hungary Turkey
Source: Bloomberg
(1) The country risk premium is the difference between the related country’s EMBI+ index and the yield of US Treasury Bills.

8
While foreign capital is very important for growth in developing countries, the recent
rally in asset prices and increased capital flows can potentially threaten financial stability
in these countries. In this respect, the timing and strategy of the exit from the extraordinary
measures that governments have taken against the crisis is crucial for the stability of the global
financial system. For the time being, there are concerns whether the private sector can provide
the necessary contribution to growth if the stimulus packages provided by governments in
developed countries are withdrawn. The increased liquidity in the markets, which is the result of
excessive expansion of balance sheets of central banks, urges banks to opt for short-term funds
and to invest these funds in high-risk assets with lower costs. Even if the high net profit margin
and the commercial profits that banks generate in this way reinforce the capital structure of
the system, it delays recovery in securitization markets, which is a vital source of wholesale
funding. Unless the wholesale and long-term funding market mechanisms become operational
again, it would take some time for long-term credits to recover. Moreover, once banks return
to high profit levels, they would be less willing to adopt risk-oriented restructuring.
To conclude, optimism that the recession had come to an end was rather short-lived and
the risks pertaining to the sustainability of recovery without government stimulus, probability of
the measures taken against the crisis creating debt crisis on public deficits and concerns over
their spill-over effects have replaced this optimism. Within this framework, should these risks
materialize, global economies will be able to exit the crisis slower than it had been expected.
Box 3. Systemic Risk and Macro-prudential Policies
Global crisis has revealed that policies aimed at containing a systemic crisis are not
sufficiently effective. With their main purpose of achieving price stability, monetary policy
actions have been proven ineffective in considering credit growth and asset prices increases as
well as in terms of preparedness against crises. On the other hand, micro-prudential policies,
focusing on the resilience of individual financial institutions against crises, have been deficient
in mitigating system-wide risks.
As a result, macro-prudential policies aimed at minimizing the formation of systemic risks

and their potential impact on the society as a whole have attracted attention in international
platforms. Especially, their importance as a complement to micro-prudential policies that deal
with financial institutions have been clearly recognized.
Macro prudential policies’ approach to systemic risk can be assessed with its two aspects.
The first is to take into account the evolution of risks in time and to develop counter cyclical
measures. Market participants tend to take excessive risk in times of positive market conditions
whereas they do just the opposite when market conditions deteriorate. Having this tendency in
mind, macro-prudential policies that encourage accumulating resources in good times to be
used in bad times are employed to mitigate the propensity for pro-cyclical business practices.

9
The second aspect of systemic risk is to observe the distribution of risks in a specified period
of time and in this context, to analyze the contagion effect among firms and markets as well as
the concept of contribution to systemic risk. With this perspective, risks caused by systemically
important financial institutions are in focus and work is underway to create measures that would
contain such risks by imposing additional requirements and to ensure effective resolution of
cross-border financial institutions on international platforms.
In terms of national practices, it is observed that many jurisdictions place more and more
importance on systemic risk and they implement various macro-prudential measures, though
with different structures and methods. To mitigate systemic risk caused by pro-cyclicality,
measures concerning credit markets are of special importance. Imposing a limit on loan
utilization of some sectors, controlling rapidly growing risks by additional regulations, increasing
risk-weights for some claims or transactions, such as claims on credit cards, to require more
capital, tax-like deductions on loans and dynamic provisioning can be counted among such
measures implemented by countries.
Some measures that have been taken to prevent links between financial institutions and
some vulnerabilities of the system from creating systemic risk are requiring additional capital,
limiting inter-bank exposures, risk-based deposit insurance premiums, temporary restrictions on
dividend payments, limiting loan to deposit ratios and restrictions on FX risk. Similar measures
are also being used effectively in Turkey.
Although these developments at national level are considered constructive, it is obvious

that systemic impact of risks cannot be mitigated globally without international cooperation
and coordination. Therefore, as a complement to national initiatives and with the coordination
of G-20 and Financial Stability Board, various policy measures are being developed by
international organizations in order to suppress accumulating macro risks in the financial
system. Implementation of counter cyclical capital buffers, compulsory leverage and liquidity
ratios, imposing additional capital and liquidity obligations on systemically important financial
institutions are issues that are priority items on the agenda of international organizations.
Work that is carried out on this issue by the FSB and all the initiatives therein, is being closely
monitored in coordination and collaboration with other relevant authorities by the Central
Bank of Turkey, which is responsible for representing our country at the FSB.
According to Law No. 1211 primary objective of the Central Bank has been set as “to
achieve and maintain price stability” and to support this objective the Bank has been charged
with “taking precautions for enhancing the stability in the financial system”. Additionally,
because of its role in payment and settlement systems and its lender of last resort function,
the Bank places great emphasis on monitoring and preventing macro risks. In this context,
Systemic Risk Coordination Committee that has been established according to the MoU signed
among the Undersecretariat of Treasury, Banking Regulation and Supervision Agency, Central

10
bank of the Republic of Turkey and Savings Deposit Insurance Funds has assumed an important
responsibility for minimizing the systemic impact of the potential problems that could occur in
the financial sector by adapting current regulations to deal with systemic risk and directly taking
measures to reduce macro risks.
I.1.2. Balance of Payments
The current account deficit, which hit the historically high level of USD 49.2 billion on an
annualized basis in August 2008, assumed a rapid downward trend due to the unfavorable impact
of the global crisis on investment and consumption demand, and decreasing energy prices. The
current account deficit fell to as low as USD 12.6 billion in October 2009, which is the lowest
level recorded since August 2004. The current account deficit started to increase again as of the
last quarter of 2009 due to imports demand underpinned by the revival in domestic demand and
reached USD 21.9 billion as of March 2010 (Table I.1).
Table I.1. Balance of Payments (Billion USD)
2006 2007 2008 2009 03.10*

CURRENT ACCOUNT -32.2 -38.3 -41.9 -14.0 -21.9
Foreign Trade Balance -41.1 -46.8 -53.0 -24.9 -32.1
1
Total Exports of Goods 93.6 115.4 140.8 109.7 111.6
1
Total Imports of Goods -134.7 -162.2 -193.8 -134.6 -143.7
Coverage Ratio (%) 69.5 71.1 72.6 81.5 77.7
Balance of Services 13.6 13.3 17.1 16.3 15.9
Balance of Income -6.7 -7.1 -8.2 -7.7 -7.8
Current Transfers 1.9 2.2 2.1 2.3 2.1
CAPITAL & FINANCE ACCOUNT 32.1 36.7 36.3 9.0 20.2
Direct Investments 19.3 19.9 15.7 6.1 5.0
Portfolio Investments 7.4 0.7 -5.0 0.2 6.0
Other Investments 11.5 24.1 24.6 2.8 11.5
Reserve Assets -6.1 -8.0 1.1 -0.1 -2.3
NET ERRORS & OMISSIONS 0.1 1.6 5.6 5.0 1.7
Source: CBRT
(*) Cumulative figures for the last 12 months.
(1) Including shuttle trade, goods procured in ports by carriers and non-monetary gold.
The current account deficit, which was USD 41.9 billion at the end of 2008, decreased to
USD 14 billion at the end of 2009 with the effect of the crisis, while the ratio of current account
deficit to GDP decreased from 5.7 to 2.3 percent in the mentioned period. When imports and

11
exports of energy items -the primary source of current account deficit- are excluded, Turkey’s current
account for 2009 is in surplus and this shows the determining role that Turkey’s dependency on
external energy resources plays on her current account deficit (Chart I.10).
Chart I.10. Chart I.11.

Ratio of Current Account Balance to GDP1 (%) Export - Import Volumes and the Trade
Deficit1 (Billion USD)
4
220
200
2
180
2.0
160
0 140
-0.4 -0.1 120
-0.7 -2.3
-2 -1.3 -1.4 100
-3.7 80
-4 -4.6 60
-5.9 -5.7 40
-6.1
-6 20
0
12.03
03.04
06.04
09.04
12.04
03.05
06.05
09.05
12.05
03.06
06.06
09.06
12.06
03.07
06.07
09.07
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
-8
04 05 06 07 08 09
Foreign Trade Balance
CAB/GDP
Exports
CAB/GDP (Excluding energy) Imports
Source: CBRT, TURKSTAT Source: CBRT

(1) Current account balance excluding energy is calculated by subtracting the net energy (1) Cumulative figures for the last 12 months.
imports from the current account deficit. According to International Standard Industrial
Classification (ISIC, Rev. 3), energy sub-items taken into account while calculating the net
energy imports are stone coal and lignite, crude oil and natural gas under the mining
and quarrying sector, and coke coal, refined petroleum products and nuclear fuels under
the manufacturing industry.
The downward trend in imports and exports, the major components of the current account,
which started in October 2008 in annual terms, halted in the last quarter of 2009 and, as of early
2010, imports once again started to climb rapidly. Meanwhile, the recovery in exports, which
displayed a relatively limited decline during the crisis, lags behind due to the weak course of
external demand conditions and this pushes the foreign trade deficit up (Chart I.11, Chart I.12,
Chart I.13).

Imports and Exports Quantity Indices1 Imports and Exports Unit Value Indices1
180
180
170
170
160 160
150 150
140 140
130 130
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
Exports Imports Exports Imports
Source: CBRT Source: CBRT

(1) 12-month moving averages (2003=100). (1) 12-month moving averages (2003=100).

12
Although supported by the limited decline in tourism revenues and increased transportation
revenues, the surplus in the balance of services, which is another component of the current
account, decreased because of the decline in commissions collected from the trade of goods
and revenues from financial services. Meanwhile, the deficit in the balance of income slightly
contracted as income transfers decreased and interest expenses fell, as the private sector became
net external debt payer.
There has been no significant change in the current transfers that is composed of grants
received by the general government and workers’ remittances (Table I.1).
Chart I.14.
Development of the Balance of Payments Items1, 2, 3, 4, 5 (Billion USD)
60
40
20
-20
-40
-60
03.02
06.02
09.02
12.02
03.03
06.03
09.03
12.03
03.04
06.04
09.04
12.04
03.05
06.05
09.05
12.05
03.06
06.06
09.06
12.06
03.07
06.07
09.07
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
Current Account Balance Direct Investment Portfolio Investment
Other Investment Change in Reserves Net Errors & Omissions
Source: CBRT
(1) Direct Investments: Net inflows by direct investment (including real-estate)
(2) Portfolio Investment: Net securities purchases (+) / sales (-) of non-residents
(3) Other Investments: Net loan utilization (short-term and long-term) from abroad and deposit movements
(4) Change in Reserves: Increase (-) / decrease (+) in official reserves
(5) Cumulative figures for the last 12 months.
The finance account, which displayed a sharp fall due to the decline in capital inflows
and even some outflows due to the global crisis, decreased as low as USD 2.2 billion on an
annualized basis in August 2009 coming down to the lowest level recorded since October
2003. As of the second quarter of 2009, capital inflows accelerated again and reached USD
20.2 billion by March 2010 (Chart I.14, Table I.1).
An analysis of the finance account by main sub-items reveals that although foreign direct
investments followed a downward trend throughout 2009 due to the global financial crisis, they
still remained the most stable financing item of the current account deficit. Meanwhile, capital
flows in the form of portfolio investments, which turned outwards in the second half of 2008
due to the global turmoil, turned generally inwards again as of the second quarter of 2009; but
followed an unstable trend. The capital inflows in question reached USD 6 billion annually by
March 2010 (Chart I.14, Table I.1).
As a result of the crisis, many international financial institutions decreased their leverage,
which in return led to tighter credit conditions abroad. Consequently, banks and the corporate
sector became net foreign debt payers and this development was reflected on the finance account
as capital outflows. However, as of the last quarter of 2009, the value of the finance account

13
turned positive again as domestic banks decreased their FX assets held at their correspondent
banks abroad and non-residents increased their deposits in Turkey.

Short-Term External Debt1 and International Import Coverage Ratio of Reserves1,2
Reserves2 (Billion USD, %) (Billion USD, Month)
90 180 200 10
80 160 180 9
70 140 160 8
60 120 140 7
120 6
50 100
100 5
40 80
80 4
30 60
60 3
20 40
40 2
10 20
20 1
0 0 0 0
06 07 08 09 03.10* 06 07 08 09 03.10*
International Reserves (A) International Reserves
Short Term External Debt (B) Imports
A/B (Right-hand Axis) Months (Right-hand Axis)
Source: Undersecreatariat of Treasury, CBRT Source: CBRT

(1) Short-Term External Debt = General Government + CBRT + commercial (1) International Reserves = CBRT gross foreign exchange reserves (including gold)
banks+other sectors. (2) Months figure indicates the number of months of imports covered by the year-end
(2) International Reserves = CBRT gross foreign exchange reserves (including gold) international reserve figure.
(*) Short-Term External Debt data are provisional. (*) Cumulative figures for the last 12 months are used for imports.
One of the indicators of external debt service capacity, the ratio of international reserves
to short-term external debt stock, which was 147.2 percent at end-2008, became 135.4
percent in March 2010 due to the rise in short-term external debt-stock and the fall in reserves
(Chart I.15). The ratio of international reserves to total imports, which shows for how long a
country can provide the inputs needed from external markets without depending on any external
support, followed an upward trend throughout 2009 due to the fact that there has been no
significant change in reserves despite the slump in imports during the crisis period. The ratio
in question has slightly eased by March 2010 parallel to the run-up in imports since the last
quarter of 2009(Chart I.16).
Table I.2. Developments in Financial Accounts (Billion USD)
2006 2007 2008 2009 03.10*

Current Account -32.2 -38.3 -41.9 -14.0 -21.9
Finance Accounts 32.1 36.7 36.3 9.0 20.3
General Government (incl. CBRT and reserves) -2.9 -15.5 -1.4 1.6 5.4
Private Sector (incl. Banks) 35.0 52.2 37.7 7.3 14.9
Net Errors & Omissions 0.1 1.6 5.6 5.0 1.7
Source: CBRT
(*) Cumulative figures for the last 12 months.
While the main determinant of the financial account used to be long-term funds obtained
by the private sector including banks, this has changed recently and in addition to the funds
obtained by the private sector, the general government has started to engage in the financing of
the current account deficit via loans from abroad and government bond issues (Table I.2).

14

Net Assets of International Banks in Selected Roll-over Ratios1 for Long-term Loans of Banks
Countries1 (Billion USD) and Non-Bank Sector2 (%)
1.600 80 600
1.400 70
500
1.200 60
400
1.000 50
300
800 40
600 30 200
400 20
100
200 10
0
0 0
12/07
03/08
06/08
09/08
12/08
03/09
06/09
09/09
12/09
03/10
05 06 07 08 09
UK US
Emerging Europe Turkey (Right Axis) Banks Non-Bank Sector
Source: BIS Source: CBRT

(1) Data for end-2009 are provisional. (1) 12-month moving averages of the roll-over ratios are used.
(2) Non-Bank Sector comprises all real persons and public and private entities excluding
banks and the general government.
By the end of 2009, net assets of banks reporting to the Bank for International Settlements
(BIS) in the US and UK remained below the pre-crisis level, while they remained flat in emerging
European countries. Meanwhile, net assets of these international banks in Turkey displayed a
downward trend with the onset of the crisis and declined to USD 73.3 billion by the year-end
(Chart I.17).
Rollover ratios of long-term loans borrowed by the banks and the non-bank sector from
abroad decreased significantly compared to the pre-crisis period. Both the banks and the non-
bank sector have been net payers of long-term loans for the last year and they have held onto
a decreasing trend for their external debt (Chart I.18).
To conclude, the current account deficit, which rapidly narrowed starting from the last
quarter of 2008 owing to the slowdown in economic activity due to the crisis and the decline in
energy prices, has begun to widen again as of the last quarter of 2009 with the rise in imports
propelled by the recovery in domestic demand on the back of the fading effects of the crisis.
Moreover, growth in European countries, which are the most important trade partners of Turkey,
has not accelerated yet and this creates an expansionary effect on the current account deficit
by adversely affecting our exports performance. Therefore, Turkey’s export performance, which
is closely related to the recovery in European economies, and the course of energy prices that
have a significant weight in Turkey’s imports will determine the course of current account deficit
in the upcoming period.
I.2. Growth and Inflation
In 2009, the Gross Domestic Product (GDP) shrank by 4.7 percent due to global financial
turmoil (Chart I.19). The economic contraction observed as of the last quarter of 2008 was
reversed as of the last quarter of 2009. It is projected that a high growth rate will be achieved,

15
thanks to continued growth in the first quarter of 2010 and the low base effect. However, the
pace of recovery is still unknown as developments in global markets will affect external demand
directly and domestic demand indirectly in the upcoming period.

Growth Rate and Composition1, 2 Contributions of Sectors to Growth1
(%, Points) (%, Points)
9 10
7 8
5 6
3 4
1 2
-1 0
-3 -2
-5
-4
-7
-6
06 07 08 09
06 07 08 09
Consumption Investment Agriculture Industry Services
Net Exports GDP Growth Construction Fin. Intermediation
Source: TURKSTAT Source: TURKSTAT

(1) Annual percentage change. (1) Construction and financial intermediation agencies are not included in the total for
(2) Net exports = Exports of Goods and Services-Imports of Goods and Services the services sector.
When the composition of growth is analyzed with respect to expenditures, it is observed

that the 19.2 percent-fall in investment expenditures in 2009, which had started to decline in
2008, played an important role in the economic contraction observed throughout 2009. The
private sector slashed investment expenditures significantly because of uncertainty driven by
the crisis, the decline in direct foreign investments and difficulty in finding long-term financing
resources (Chart I.19).
The contraction in total consumption expenditures remained limited as the public sector
increased its expenditures throughout 2009 with the aim of mitigating the effects of the crisis.
The rise in total consumption expenditures, which started in the last quarter of 2009, is expected
to continue in the first quarter of 2010 with the contribution of the low base effect (Chart
I.19).
As imports contracted faster than exports throughout 2009, net exports made a positive
contribution to growth. Nevertheless, parallel to the economic recovery in the last quarter of
2009, imports grew faster than exports. Under the assumption that the recovery in demand in
Turkey’s largest trade partner, Europe, will take a long time, the rise in exports is expected to be
gradual. Within this framework, the current trend is expected to continue throughout 2010 and
net exports are expected to have a negative effect on growth (Chart I.19).
When GDP is analyzed with respect to production, it is observed that all sectors, except
financial services and agriculture, have made negative contributions to growth in 2009. The
surge in industry, financial services and trade in the last quarter of 2009 led to a rise in GDP
in the last quarter of 2009 compared to the same quarter of 2008. The rapid growth trend
especially in the industrial sector continued in the first quarter of 2010 with the contribution of
the low base effect (Chart I.20).

16
Chart I.21.
Industrial Production1 (2005=100, Annual % Chart I.22. Industrial Production1, Capacity
Change) and Capacity Utilization Rate2 Utilization Rate1 and Growth
(Annual Point Difference)
18
20
16
14
12 10
8 6
4
2
0
-2
-4
-6
-8
-12 -10
-16 -14
-20 -18
-24
-22
01.08
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
04.10
I.08
II.08
III.08
IV.08
I.09
II.09
III.09
IV.09
I.10
Industry Production Index
Industry Production Index GDP CUR
Capacity Utilization Rate
Source: TURKSTAT and CBRT Source: TURKSTAT

(1) Industrial Production Index data adjusted for calendar effects were used. (1) In order to be able to compare with GDP growth, the year-on-year change of
(2) Data for “Manufacturing Industry Capacity Utilization Rate” are based on answers of Capacity Utilization Rate and the quarterly Industrial Production Index adjusted for
manufacturing industry sector firms in CBRT’s “Business Tendency Survey”. calendar effects were used.
Manufacturing industry capacity utilization rate and the industrial production index, which
started to decline in 2009 due to the contraction in both domestic and external demand, came
down to their lowest level in March 2009 to be followed by a rapid recovery. Also underpinned
by the low base, the industrial production index started to pick up as of October 2009 y-o-y
(Chart I.21 and I.22).
Chart I.23.
Corporate Sector Confidence Index
130
120
110
100
90
80
70
60
50
03.07
06.07
09.07
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
04.1
0
Confidence Index-Real Sector Confidence Index-Real Sector - 3 Month Moving Averages
Source: CBRT
The recovery trend in economic activity was reflected onto the real sector confidence
index and to the establishment of new companies. The real sector confidence index, which
started to climb as of the beginning of 2009 and surpassed the threshold value of 100 in July,
however, fell as of this date and came down to 91.2 of index value by the end of November. As
of December 2009, the real sector confidence index started to rise again and reached 118.8
in April 2010 (Chart I.23). The establishment of new firms, which had decreased due to the

17
slowdown in economic activity, started to pick up again as of the last quarter of 2009. The
net number of newly established firms, which had reached a peak by the end of March 2008
with 45,842 firms, came down to 31,994 in September 2009. In the last quarter of 2009,
the decline in the net number of new firms ended and the number of newly established firms
became 34,077 in December 2009 and 36,581 in March 2010 (Chart I.24).

Number of Newly Established and Liquidated The Ratio of Over-Drawn Cheques Presented to the
Companies and Cooperatives (Thousand)1 ICH to the total Cheques Presented to the ICH1 (%)
60 10
50 9
8
40
7
30
6
20
5
10 4
0 3
99
00
01
02
03
04
05
06
07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
02.10
03.10
2
12.06
03.07
06.07
09.07
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
04.10
Newly Established
Liquidated
Net Newly Established Number (%) Value (%)
Source: TURKSTAT and TOBB Source: CBRT

(1) Annualized data used. (1) 3-month moving average
The ratio of overdrawn cheques presented to the Interbank Clearing House (ICH) to total
cheques presented to the ICH, which had been rising since September 2008 in terms of both
number and value, headed down as of the second quarter of 2009 and stood at 4.7 and 4.0
percent, respectively in April 2010 (Chart I.25).

12-Month PPI and CPI Developments End-Year CPI Expectations (%)
(Annual % Change)
20 12
16 10
12 8
8 6
4 4
0 2
-4 0
12.04
03.05
06.05
09.05
12.05
03.06
06.06
09.06
12.06
03.07
06.07
09.07
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
04.10
12.04
03.05
06.05
09.05
12.05
03.06
06.06
09.06
12.06
03.07
06.07
09.07
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
04.10
Exp. CPI for end-year Inflation Target

CPI PPI End-Year CPI
Source: TURKSTAT Source: CBRT and TURKSTAT

18
Annual Consumer Prices Index (CPI) inflation increased by 3.7 percent in the first four
months of 2010 and reached 10.19 percent in April. The rise in question was mainly driven
by price increments stemming from tax adjustments introduced in January covering fuel-oil
products, alcoholic beverages and tobacco products; the surge in unprocessed food prices
and the low base stemming from last year’s tax cuts. Meanwhile, the Producer Prices Index
(PPI) also rose to 10.4 percent in the said period due to the price increments in agriculture and
basic metal and the pressure of producer prices on consumer prices became more clear (Chart
I.26).
Actually, CPI expectations for end-2010 are hovering above the 6.5 percent target.
Inflation, which followed an upward trend in the first quarter of 2010 due to the cost-push
pressures and the low base effect due to tax cuts, is expected to gradually head downwards
as the mentioned effects fade away. Within the framework of the recent developments, CPI
expectations for end-2010 have risen to 8.6 percent that is parallel to the CBRT’s year-end
inflation forecast of 8.4 percent (Chart I.27).
The recovery trend observed in economic activity as of the second quarter of 2009
is expected to continue in the first quarter of 2010. Despite the steady recovery in domestic
demand, the uncertainties pertaining to external demand still linger due to the problems in
EU countries, which make up 45 percent of our total exports. Therefore, the projection that
the recovery in economic activity will be gradual is retained and total demand conditions are
expected to underpin disinflation for quite some time.
I.3. Public Finance
In 2009, declining tax revenues due to the economic contraction and measures taken
to mitigate the effects of global turmoil led to deterioration in the public fiscal balance in
Turkey, as was the case in many countries.
In 2009, central government revenues increased by 2.6 percent and primary expenditures
were up by 21.4 percent compared to 2008. As the rise in total expenditures was 17.8 percent,
the ratio of expenditures covered by revenues declined by 11.8 points (Table I.3). The increase
in primary expenditures is triggered by the fact that 5 percentage points of the employers’ social
security insurance premia has begun to be paid by the Treasury since October 2008, coupled
with the rise in transfers made to the Social Security Institution due to the slowdown in collection
of the Institution’s premium revenues. As revenues from privatization and taxes also lagged
significantly behind the targets, the central government budget deficit surged significantly and
reached TL 52.2 billion (Table I.3). Nevertheless, owing to the boost in economic activity in the
final quarter of the year, tax revenues surpassed the estimations presented in the Medium-Term
Program (MTP), while interest expenditures remained lower than expected, thus leading the
central government budget deficit to remain below the MTP forecast.

19
Table I.3. Central Government Budget Realizations (Billion TL)
Budget Budget Real. /Ann. Real. /

Target Jan.- Target Real. (Jan- Budget
Change for Jan.-Apr. Apr. Change for Apr 2009) Target (Jan-
2008 2009 (%) 2009 2009 2010 (%) 2010 (%) Apr2010) (%)
Expenditures 227,0 267,3 17,8 259,2 87,4 93,5 7,0 287,0 32,7 32,6
Interest Expenditures 50,7 53,2 4,9 57,5 21,1 22,1 4,7 56,8 39,7 38,9
Primary Expenditures 176,4 214,1 21,4 201,7 66,3 71,5 7,8 230,2 31,0 31,1
Revenues 209,6 215,1 2,6 248,8 67,4 77,8 15,4 236,8 31,3 32,9
Tax Revenues 168,1 172,4 2,6 202,1 51,0 63,2 23,9 193,3 29,6 32,7
Revenues to Expendi-
tures (%) 92,3 80,5 - 96,0 77,1 83,2 - 82,5 - -
Budget Deficit -17,4 -52,2 200,0 -10,4 -20,1 -15,8 -21,4 -50,2 38,5 31,5
Primary Surplus 33,2 1,0 -97,0 47,1 1,1 6,3 472,7 6,6 110,0 95,5
Source: Ministry of Finance
The budget balance improved on the back of tax revenues rising parallel to the revival
in economic activity in 2010. In the first four months of 2010, central government budget
expenditures and revenues increased by 7 percent and 15.4 percent, respectively, compared
to the same period of 2009. As a result, the ratio of expenditures covered by revenues rose
year-on-year and stood at 83.2 percent (Table I.3).
Primary expenditures, which were up by 7.8 percent, were instrumental in the surge in
expenditures (Table I.3). A detailed analysis of the said expenditures reveals that personnel
expenditures and current transfers rose by 11.5 percent and 10.1 percent, respectively,
whereas the purchase of goods and services declined by 10 percent. The said decline was
mainly attributable to the decrease in health expenditures on the back of the coverage of
public employees’ health expenditures by the universal health insurance scheme from January
2010 onwards, in addition to the reduction in health expenditures of green card holders.
Meanwhile, within the scope of the same scheme, universal health insurance started to be paid
for public employees, which led to a 55.4 percent-increase in premia paid by the state to the
Social Security Institution.
In the first four months of 2010, while non-tax revenues decreased by 17.6 percent, tax
revenues increased by 23.9 percent. The decrease in non-tax revenues is attributable to the
base effect created by the transfer of TL 1.3 billion from the Unemployment Insurance Fund to
the budget in February 2009 and TL 1.8 billion obtained from the sale of the 3rd Generation
GSM license in April 2009. Owing to the revival in economic activity, VAT on imports and
corporate tax rose by 57.8 percent and 34.5 percent, respectively, with special consumption
tax and domestic VAT increasing by 30.2 percent and 23.7 percent, respectively, in the first
four months of 2010.
Parallel to these developments, the central government budget deficit, which was TL
20.1 billion in the first four months of 2009, declined to TL 15.8 billion in the same period of
2010. In the meantime, the primary surplus posted by the central government budget, which
was TL 1.1 billion, rose to TL 6.3 billion (Table I.3).

20
Box 4. Draft Law on Fiscal Rule
It was declared on the Medium Term Programme (MTP) that, starting from 2011 budget
year, public fiscal management would be carried out in accordance with the determined fiscal
rules, in order to ensure budget discipline and contain public deficit in the medium term. In this
framework, Fiscal Rule Draft Law was announced on May 11, 2010.
The “Fiscal Rule” aims to establish long-term predictability on fiscal policy, enhance
confidence and stability in the economy, minimize public sector borrowing cost by lowering risk
premium through increasing credibility, enable private sector access to longer term resources
at lower costs by increasing the predictability of long term borrowing requirement of public
sector and entrench fiscal discipline. According to the Fiscal Rule, in any given year, the ratio
of the general government deficit to GDP cannot exceed the figure arrived at by adding the
general government deficit adjustment to the ratio of the general government deficit to the
GDP in the previous year. Public deficit adjustment was defined in MTP as shown below:
Δat = y (a(t-1) – a*) + k (bt – b*)
Δat: Adjustment in the public deficit / GDP

a(t-1): Previous year’s public deficit / GDP
a* : Medium-long term public deficit target/GDP
bt : Real GDP growth rate
b* : Long term average of real GDP growth rate
y : Convergence coefficient of public deficit to medium-long term target
k : Reflection coefficient of cyclical effects
(y and k coefficients are negative. The negative Δa indicates a decrease in public deficit).
With the Draft Law that was announded on May 11, 2010, the definition of public deficit,
parameters related to public deficit adjustment, essentials related to implementation, reporting
and auditing were identified. Accordingly, public deficit was determined as general government
deficit1, y and k coefficients were determined as -0.33, medium-long term public deficit target
to GDP was determined as 1 percent, and long term average of real GDP growth rate was
determined as 5 percent. As a result, adjustment in the general government deficit to GDP (Δa)
was finalized as below:
Δa = -0.33 (a(t-1) – 1) – 0.33 (b – 5)
According to the Draft Law, general government deficit ceilings for the next three years
calculated in accordance with fiscal rule will be determined in the Medium Term Program and
Fiscal Plan, in case of a change in general government deficit to GDP ratio of the pervious year
and/or real GDP growth rate in a given year, the deficit ceiling will be updated and announced
to the public, whether there is a deviation from the rule in a given year shall be determined

21
by comparing general government deficit to GDP ratio with the final ceiling, fiscal statistics
on general government shall be disclosed quarterly and annually by the Ministry of Finance
through the Fiscal Rule Surveillance Report. The Turkish Court of Accounts will assess and
announce the accuracy, reliability and conformity with pre-determined standards of the data
provided in Fiscal Rule Surveillance Report within three months following its publication.
Law on Fiscal Rule will be an important step towards controlling budget deficits in Turkey.
It is anticipated that transparent fiscal policies will have a positive effect on economic stability
and growth.
Source: Treasury
(1) General government consists of central government, Social Security Institution, local administrations, revolving funds, Unemployment Insurance Fund
and other institutions.
The ratio of public net debt stock to GDP, which displayed a decreasing trend until end-
2008, rose to 32.5 percent in 2009. This was driven by the increase in public gross debt stock
and the decline in GDP as opposed to the increase in net assets of the Central Bank, public
deposits and net assets of unemployment insurance fund (Chart I.28). Public gross debt stock
posted an increase mainly due to the rise in domestic debt stock. The ratio of EU-defined
general government nominal debt stock to GDP also went up compared to 2008 (Chart I.29).

Composition of Total Public Sector Net Debt General Government Nominal Debt Stock
Stock1 (%) Defined by EU Standards1 (%, Billion TL)
50 50
440 70
41.6
65
40 40 400
60
34.0 32.5 360
35.2 52.3 55
29.5 28.2
30 30 50
320 46.1 45.5
30.0 29.8
28.1 45
280 39.4 39.5
20 26.1 20 40
240 35
10 10 30
6.5 200
4.0 2.7 25
2.1
1.3
160 20
0 0
05 06 07 08 09 05 06 07 08 09
Net External Debt Stock General Government Debt Stock Defined by EU

Standards
Net Domestic Debt Stock
Total Public Net Debt Stock General Government Debt Stock Defined by EU
Standards / GDP (Right-hand axis)
Source: Undersecretariat of Treasury Source: Undersecretariat of Treasury

(1) Public sector net debt stock is calculated by subtracting Central Bank net assets, (1) Consolidated nominal debt stock as defined in the European System of Accounts 95
public deposits and unemployment insurance fund net assets from public sector gross (ESA 95) deficit and debt manual.
debt stock.
Regarding the composition of domestic debt stock, the issue of CPI-indexed bonds of
TL 20.973 million in the February-November 2009 period led the share of CPI-indexed debt
stock to rise compared to end-2008, whereas the shares of floating-rate, FX-denominated, FX
indexed and fixed-rate debt stocks went down (Chart I.30). While the decline in the share of
floating-rate debt stock and the increase in the share of CPI-indexed debt stock continued by

22
March 2010, the share of fixed-rate debt stock rose by a small margin compared to end-2009
(Chart I.30). Despite the fall in fixed-rate debt stock compared to 2008, the increase in the
share of CPI-indexed debt stock restricts the susceptibility of domestic debt stock to interest
rate risk.
Chart I.31.
Chart I.30. Maturity Structure of Government Domestic
Composition of Domestic Debt Stock (%)1,2 Debt Stock (Month)1
100 5.2 4.1 40
10.2 8.4
13.8
2.5 3.2 9.0 11.2
35
80
30
26.4
41.9 41.5 42.5 41.9 40.2 25.7
24.0 24.4
60 25 23.9
20
40
15
44.3 45.8 45.9 43.9 44.5 10

20
5
0 0
06 07 08 09 03.10 06 07 08 09 03.10
FX Denominated/FX Indexed TL Fixed Rate TL Floating Rate
CPI Indexed
TL Floating Rate FX Denominated FX Indexed
TL Fixed Rate Total Stock
Source: Undersecretariat of Treasury Source: Undersecretariat of Treasury
(1) CPI-indexed bonds began to be issued in February 2007. (1) Calculation is based on term to maturity.
(2) The TL denominated RIB that began to be issued in January 2009 is classified in TL
Floating Rate Debt Stock and FX-denominated RIB is classified in FX Denominated/FX
Indexed Debt Stock.
The average maturity of government securities, which decreased to 23.9 months by the
end of 2008, increased to 24.4 months by end-2009 and to 26.4 months as of March 2010,
as CPI-indexed bonds issued have long-term maturities (Chart I.31).
Chart I.32.
Government Domestic Debt Securities by Holders1,2,3 (%)
100
8.9 6.2 7.3
13.3 12.3
90
80 24.0 22.5
26.7
22.6 25.5
70 3.1 2.5
60 9.8 6.1
6.7
50
40
66.7 67.7
30 58.3
54.3 55.5
20
10
0
06 07 08 09 04.10
Bank Household Other Domestic Residents Non-residents
Source: BRSA-CBRT
(1) Based on nominal amounts.
(2) “Bank” includes GDDS owned by banks operating in Turkey; “Households” includes GDDS that belong to real persons kept at domestic banks; “Other domestic residents” includesGDDS
of domestic legal persons other than banks and households, and also GDDS of mutual funds kept at banks; and “Non-residents” involves non-resident real and legal persons’ GDDS
kept at domestic banks.
(3) GDDS owned by the Central Bank are excluded.

23
Banks hold the bulk of government securities, which make up a major part of banking
sector assets. As of April 2010, the share of banks kept increasing, whereas that of households
maintained its downward trend (Chart I.32).
In conclusion, global turmoil had significant adverse impact on the performance of

public finance in Turkey in 2009, as was the case in many countries. The surge in the central
government budget deficit resulted in an upswing in the public borrowing requirement.
However, in the MTP, ways to ensure fiscal discipline in the 2010-2012 period was addressed,
and it was targeted to gradually decrease primary expenditures, increase tax income, reduce
central government budget deficit and to raise the IMF-defined public sector primary surplus.
Furthermore, with the draft bill on Fiscal Rule announced on 11 May 2010, it is aimed to ensure
budget discipline and to contain public debt in the medium term. The central government
budget performance for 2010 indicates an improvement in public finance. In order to make
this improvement sustainable, it is essential that the fiscal rule and the measures set out in the
MTP will be implemented.
I.4. Private Sector Developments
I.4.1. Households
Household liabilities continued to increase throughout 2009 that was marked by the
global crisis.

Household Liabilities to GDP (%)1 Retail Loans to Household Consumption
Expenditures (%)1
18 16
15.4 13.8
16 14
12.6
13.6
14
12.3 12 11.1
12
10.1 10 9.3
10
8
8
6
6
4
4
2 2
0 0
06 07 08 09 06 07 08 09
Source: CBRT-BRSA, TURKSTAT Source: CBRT-BRSA, TURKSTAT
(1) Household liabilities consist of gross consumer credits and credit card (1) Retail loans consist of gross consumer credits and credit card balances extended
balancesextended by banks and consumer finance companies and liabilities to TOKI due bybanks and consumer finance companies deducted housing credits.
toTOKI’s housing sales with long-term maturity.
The ratio of total household liabilities to GDP rose to 15.4 percent by 2009 from 13.6
percent in 2008 (Chart I.33). This increase was mainly driven by the development in GDP. In
the same period, the ratio of household consumption expenditures financed by retail loans
also increased from 12.6 percent to 13.8 percent (Chart I.34).

24
Table I.4. Household Disposable Income, Liabilities and Interest Payments1,2,3 (Million TL)
2007 2008 2009

Household Interest Payments 15,576 19,653 21,113
Household Liabilities 104,111 128,966 147,083
Household Disposable Income 335,157 379,524 390,245
Interest Payments / Household Disposable Income (%) 4.6 5.2 5.4
Liabilities / Household Disposable Income (%) 31.1 34.0 37.7
Source: BRSA-CBRT, TURKSTAT, SPO

(1) Household liabilities consist of gross consumer credits and credit card balances extended by banks and consumer finance companies and liabilities to TOKİ due to TOKİ’s housing
saleswith long-term maturity.
(2) As the repayments related to liabilities fromTOKI’s housing sales with long-term maturity are indexed to civil servant salaries, they are not included in interest payments.
(3) Household disposable income has been calculated by using private sector disposable income estimation for 2008 and 2009 as mentioned in the 2010 Annual Programme, assuming
that the ratio of household disposable income for 2007, which was generated from the Income and Living Conditions Survey, to private sector disposable income has not changed. Since
household disposable income generated from Income and Living Conditions Survey has been utilized, the figures differ from those in the previous Financial Stabilty Reports.
In 2009, household liabilities and interest payments increased by 14 percent and 7.4
percent, respectively, compared to 2008. In the same period, the ratio of household interest
payments to disposable income, one of the main indicators of the households’ repayment
capacity, rose from 5.2 percent to 5.4 percent, while the ratio of total household liabilities to
disposable income increased from 34 percent to 37.7 percent (Table I.4).
Box 5.
Income and Living Conditions Survey
In December 2009, Turkish Statistical Institute published the results of its “Income and
Living Conditions Survey” for the years 2006-2007. With this research, statistics on equalized
household disposable income distribution are produced for the first time. Since individual
welfare level comes into prominence in equalized disposable income distribution, the number
of members in a household is as important as the total household income in the calculations
and total household disposable income should be converted into per capita income by
taking into consideration the number of members in the household. For making an accurate
comparison, the equivalent size in terms of adult persons of each household is determined by
using an equivalence scale.
Table 1. Equalized Household Disposable Income Groups* (%)

Turkey Urban Rural
2006 2007 2006 2007 2006 2007
First 20 %** 5.1 5.8 5.5 6.2 5.6 6.4
Second 20 % 9.9 10.6 10.3 11.0 10.2 11.1
Third 20 % 14.8 15.2 15.0 15.3 15.3 16.0
Fourth 20 % 21.9 21.5 21.8 21.2 22.6 22.3
Fifth 20 %** 48.4 46.9 47.5 46.2 46.3 44.2
Total 100.0 100.0 100.0 100.0 100.0 100.0
Gini Coefficient 0.43 0.41 0.42 0.39 0.41 0.38
Fifth 20%/First 20% 9.5 8.1 8.6 7.5 8.3 6.9
Source: TÜRKSTAT
(*) Reference period for income information is the previous calendar year.
(**) When individuals are listed from the least amount to the most by equalized household disposable income and divided into 5 equal parts, the bottom income group is defined
as “the first 20 %” and the top income group is defined as “the fifth 20 %”.

25
According to the survey results of 2007, among the five quintile groups of the population,
the share of the highest income group in total income is 8.1 times the share of the lowest
income group. In comparison to the previous year when the ratio was 9.5, it is observed that
the share of the three lowest income groups in total income rose whereas that of the two
highest income groups fell.
Gini coefficient, which is an indicator of income inequality, represents greater inequality
in income distribution as it approaches “1” and it represents greater equality in income
distribution as it approaches “0”. Gini coefficient is 0.43 according to the results of 2006 and
it is calculated as 0.41 according to the results of 2007.
Chart 1. Lorenz Curve for Turkey

100
90
80
Cumulative Income (%)
70
2006 2007
60 53.1
50
51.7
40
31.6
30
16.4 29.8
20
5.8
10 15.0
5.1
0
0 20 40 60 80 100
Cumulative Population (%)
Source: TURKSTAT
Lorenz curve is a graphical demonstration of inequality in distribution of income among the

population. The curve intersects the endpoints of a square’s diagonal. Cumulative shares of
income are indicated by percent on the vertical side of the square while cumulative shares of
income are indicated by percent on the horizontal side of the square. The fact that the Lorenz
curve for 2007 is closer to the diagonal than the curve for 2006 indicates an improvement in
income distribution.
Between 2006 and 2008, the ratio of total household liabilities to GDP in EU-member
developed countries declined, while it has been displaying an increase in Turkey and new EU-
member developing countries in general. Despite this rise, the ratio of household liabilities
excluding housing loans to GDP in Turkey is close to that of new EU-member states; and the
ratio of its total liabilities to GDP is still below that of many EU countries including the new
members (Table I.5)

26
Table I.5. Ratio of Household Liabilities to GDP in Selected Countries (%)
Ratio of Household Liabilities Excluding Ratio of Total Household Liabilities to

1 2
Housing Loans to GDP GDP
2006 2007 2008 2006 2007 2008

Germany 20.0 18.7 18.1 61.9 58.5 56.6
Austria 20.9 20.7 20.1 44.6 44.7 45.5
Belgium 8.7 8.5 8.3 42.4 42.4 33.4
Bulgaria
Kaynak: IMKB 11.4 14.5 15.5 18.3 24.4 27.2
Czech Republic 5.3 6.2 6.6 17.3 21.5 22.1
Denmark 18.0 20.6 20.5 116.9 126.2 129.4
Estonia 7.0 8.6 9.1 39.4 45.2 48.3
Finland 13.6 13.6 14.0 46.7 48.2 50.6
France 12.3 12.3 12.0 43.8 46.2 47.5
Holland 9.6 8.4 8.1 78.0 75.3 71.3
United Kingdom 14.1 12.7 10.9 73.4 66.5 54.2
Ireland 16.1 16.6 17.7 78.9 81.7 79.6
Spain 20.7 21.2 21.1 76.4 80.3 80.7
Sweden 22.4 22.5 20.9 62.5 62.9 60.1
Italy 12.6 12.9 13.0 29.0 30.1 29.8
Latvia 9.4 8.8 8.2 38.6 40.9 39.2
Lithuania 6.6 8.5 8.3 19.2 25.5 27.1
Luxembourg 40.8 36.8 33.9 76.2 77.1 77.3
Hungary 9.2 10.9 13.6 21.1 23.1 27.5
Poland 10.7 12.9 12.3 18.2 23.5 25.2
Portugal 15.1 16.4 17.0 74.2 78.4 80.3
Romania 9.7 12.8 14.2 11.9 16.0 18.0
Slovakia 6.0 6.1 6.3 17.7 18.4 19.4
Slovenia 11.0 12.0 11.9 17.4 19.8 21.1
Greece 13.0 13.3 12.9 37.5 41.1 39.8
EU 27 15.3 15.0 14.6 56.1 55.4 52.7
Turkey 6.6 7.9 8.8 10.1 12.3 13.6
Source: ECB, CBRT, TURKSTAT

(1) The figure is 9.9 percent in 2009 for Turkey.
(2) The figure is 15.4 percent in 2009 for Turkey.
When the development of household liabilities is analyzed by type, it is observed that

housing loans increased by 17.6 percent, other consumer loans went up by 16.4 percent
and credit card balances increased by 12.3 percent, whereas vehicle loans decreased in
2009 compared to end-2008 figures. In March 2010, housing loans, other consumer loans
and credit cards increased by 6.7 percent, 7.1 percent and 0.7 percent, respectively; while,
vehicle loans went down by 3.1 percent compared to end-2009 figures. As a result of these
developments, while the shares of housing loans and other consumer loans within household
liabilities increased, those of vehicle loans and credit cards decreased (Chart I.35).

27

Decomposition of Household Liabilities (%)1,2,3 Credit Card Balances of Deposit Banks and
Balances that Incur Interest Charge
(Billion TL, %)
100 45 45
90 23.2 40 40
28.7 31.1 31.7 32.4
80 35 35
70 30 30
60 30.3 25 25
27.8
28.2 27.8 26.7 20 20
50
15 15
40 11.5 7.6 4.4 4.0
5.7
10 10
30
5 5
20 35.8 36.1 36.8
35.0 35.0 0 0
10
03/06
06/06
09/06
12/06
03/07
06/07
09/07
12/07
03/08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
02.10
03.10
0
06 07 08 09 03.10 Credit Card Balances Incurring Interest Charge
Credit Cards
Housing Loans Vehicle Loans
Ratio (R.-hand axis)
Credit Cards Other
Source: BRSA-CBRT Source: CBRT
(1) Household liabilities consist of gross consumer credits and credit card balances
extended by banks and consumer finance companies and liabilities to TOKİ due to
TOKİ’s housing sales with long term maturity.
(2) Liabilities to TOKİ due to TOKİ’s housing sales with long-term maturity are also
included in housing loans.
(3) Other loans consist of all consumer loans excluding housing and vehicle loans.
Credit card balances have been on the rise during 2009. Credit card balances incurring
interest charges went down to TL 11.7 billion in end-2009 from TL 12.5 billion in March
2009; then went up to TL 12.3 billion in March 2010. The ratio of credit card balances
incurring interest charges to total credit card balances became 32.7 percent, 38.7 percent
and 34 percent in the said periods, respectively (Chart I.36).
Meanwhile, overdraft deposit accounts held by households have recently been on the
increase and accordingly the portion of these accounts extended as loans increased as well.
Considering that interest rates of these types of accounts are relatively higher than those of
consumer loans, individuals should beware of using overdraft deposit accounts except for their
short-term cash needs.
The ratio of FX-indexed consumer loans to total consumer loans, which was 4.9 percent
in 2008, decreased to 3.3 percent at end-2009 and went down to 2.8 percent in March
2010. Meanwhile, the share of FX-indexed housing loans in total housing loans declined
from 9.1 percent to 6.2 percent and 5.4 percent for the same periods (Chart 1.37). With the
amendment made to Decree No. 32 on the Protection of the Value of the Turkish Currency
on 16 June 2009, households are precluded from utilizing FX-indexed loans as well as FX-
denominated loans, which has steered the continuation of the slowdown in the share of FX-
indexed consumer loans.
Meanwhile, in Turkey, CPI-indexed variable interest rates are allowed only for housing
loans among consumer loans and the aforementioned loans constitute only 0.03 percent of
total housing loans as of March 2010. The indirect interest rate risk for households is very
limited, as variable interest rate consumer loans are at negligible levels.

28

FX-Indexed Consumer Credits and FX Indexed Unemployment Rate and NPL Ratios (%)1
Housing Credits (Million TL, %)1
5,000 10 20 10
4,500 9 9
18
4,000 8
8
3,500 7
16
3,000 6 7
2,500 5 14 6
2,000 4
5
1,500 3 12
1,000 2 4
500 1 10
3
0 0
8 2
06 07 08 09 03.10
01.08
03/08
06/08
09/08
12/08
03/09
06/09
09/09
12/09
02/10
FX Indexed Total Consumer Credit
FX Indexed Housing Credit
Non-agricultural Unemployent Rate
FX Indexed Cons. Credits/Total Cons. Credit (R-hand Axis)
Retail Loans (R-hand Axis)
FX Indexed Housing Cred/Total Housing Cred. (R-hand Axis) Credit Cards and Other Loans (R-hand Axis)
Source: BRSA-CBRT Source BRSA-CBRT, TURKSTAT

(1) Consumer finance companies are not included. (1) Seasonally-adjusted non-agricultural unemployment rate.
Also owing to the increase in loans, the NPL ratio of retail loans and credit cards
and other consumer loans has started to decrease, albeit to a limited extent as of the last
quarter of 2009. Besides, the surge in non-agricultural unemployment driven by the global
crisis starting from the second quarter of 2008, started to decrease in the second quarter
of 2009; leading to expectations that the NPL ratio will continue to go down (Chart I.38).
Table I.6. Number of Credit Card and Consumer Loan Defaulters1
12.08 06.09 09.09 2009 03.10

Banks 997,095 1,252,267 1,475,620 1,489,131 1,400,177
2
Asset Management Companies 139,862 252,916 282,856 330,156 430,197
Finance Companies 21,884 27,826 23,079 23,463 22,991
3
Total 1,093,474 1,415,791 1,664,301 1,721,004 1,690,726
Source: CBRT
(1) Customers with more than one registry to a particular financial institution group are counted only once.
(2) Represents non-performing loans taken over by asset management companies from the SDIF and banks.
(3) As customers may have registry to more than one financial institution group, the sum of the three rows in the table and grand total are not equal.
According to the Central Bank Risk Center data, the number of consumer loan and credit
card defaulters, which was 1,721,004 at end-2009, decreased to 1,690,726 in March 2010
(Table I.6).
Credit card receivables scheduled for payment plans within the legal period of 60 days
stipulated in the Provisional Article 5 of Law No. 5464 amounted to approximately TL 1 billion;
and the number of customers became 421 thousand. Some banks voluntarily extended the
application period for debt structuring, which was due on 4 September 2009, until year-end.
Thus, by the end of 2009, total credit card receivables scheduled for payment plans and the
number of customers rose to TL 1.3 billion and 553 thousand, respectively (Table I.7).

29
Table I.7.
Restructured Credit Card Receivables as per the Provisional Article No. 5 of the Law No. 5464
(Thousand TL, Number of Persons)
Restructured Receivables
Voluntarily Restructured Receiv-
within Legal Terms(07.07.2009-04 TOTAL
ables (05.09.2009-31.12.2009)
.09.2009)
Credit
Credit Card
Total Credit Credit Card Total Credit Card Recv.
Num. of Number of Total Credit Receivables Number of
Card Recv. Card After
Customers Customers Card Recv. After Re- Customers
Receivables After Resch. Receivables Reschedul-
scheduling
ing
Banks 945,311 1,276,373 406,904 276,773 385,037 125,622 1,222,084 1,661,411 532,526
Asset Man.
Compa- 34,091 64,141 14,535 12,543 24,070 6,679 46,634 88,211 21,214
nies
General
979,402 1,340,514 421,439 289,316 409,107 132,301 1,268,718 1,749,622 553,740
Sum
Source: BRSA
Total financial assets of households increased by 14.2 percent from end-2008 to reach
TL 420.6 billion at end-2009. They became TL 429.9 billion in March 2010 (Table I.8).
Table I.8. Composition of Household Financial Assets1 (Billion TL, %)
2008 2009 03.10
Billion TL % Share Billion TL % Share Billion TL % Share

TL Deposits 188.7 51.2 209.5 50.0 220.3 51.2
FX Deposits 89.0 24.2 97.0 23.1 94.1 21.9
- FX Deposits (Billion USD) 59.1 - 64.5 - 61.7 -
Currency in Circulation 30.6 8.3 35.4 8.4 36.6 8.5
GDDS+Eurobond 19.7 5.3 14.1 3.4 12.5 2.9
Mutual Funds 20.8 5.6 26.1 6.2 26.4 6.1
Stocks 10.6 2.9 24.6 5.9 27.3 6.4
Private Pension Funds 6.4 1.7 9.0 2.1 9.7 2.3
Repos 2.2 0.6 2.3 0.5 1.8 0.4
Precious Metal Deposits 0.3 0.1 1.1 0.3 1.2 0.3
Total Assets 368.3 100.0 419.1 100.0 429.9 100.0
Source: BRSA-CBRT, and FX CMB, CRA

(1) TL and FX deposits include participation funds.
The share of TL deposits, which constitutes the largest portion of household assets, went
down to 50 percent in 2009, later to resume its end-2008 levels in March 2010 (Table I.8).
The share of TL deposits in total deposits, which was 68 percent at end-2008, went up to
68.4 percent at end-2009 and to 70.1 percent in March 2010. As exchange rate movements
gained relative stability in 2009, the amount of FX deposit accounts, which increased until
September 2009, started to decrease from that date. Accordingly, the ratio of exchange
rate and parity-adjusted total TL investment instruments to FX investment instruments of the

30
households decreased until September 2009, but went up later (Chart I.45). Moreover, the
share of government securities and Eurobonds decreased, while that of equities increased
within household financial assets (Table I.8).

Ratio of Household TL Investment Instruments Household Financial Assets and Liabilities
to FX Investment Instruments1 (Billion TL, %)1
3.4 3.4 450 50
3.2 3.2 400 45
3.0 3.0 350 40

35.0 35.1 35.8
2.8 2.8 300 33.2 35
2.6 2.6 27.5
250 30
2.4 2.4 200 25
2.2 2.2 150 20
2.0 2.0 100 15
1.8 1.8 50 10
1.6 1.6
0 5
12.06
03.07
06.07
09.07
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
06 07 08 09 03.10
Total Liabilities
Total Assets
(a) (b) Household Liabilities/Assets(R-hand Axis)
Source BRSA-CBRT, CMB, CRA Source: BRSA-CBRT, CMB, CRA

(1) TL Instruments = Deposits + Repos + Gov.Dom.Debt.Sec. + Participation Funds(TL) + (1) Household Assets = Savings Deposits + FX Deposits + Money in Circulation+Gov.
Stocks + Private Pension Funds + Mutual Funds (starting from April 2006);FX Instruments Dom.Debt.Sec. + Eurobonds + Repos + Stocks + Pension Funds + MutualFunds
= FX Deposits + Gov.Dom.Debt.Sec. + Eurobond + Participation Funds(FX). (starting from December 2006). Household liabilities consist of gross consumer credits
(a) Current TL value of FX deposits and Participation Funds (FX). and credit card balances extended by banks and consumer finance companies and
(b) For FX deposits and Participation Funds (FX), exchange rate prevailing on 29.12.2006is liabilities to TOKİ dueto TOKİ’s housing sales with long term maturity.
used and the parity effect is eliminated.
FX-indexed liabilities of households to the banking sector are USD 1.9 billion in March
2010 while FX-denominated assets are USD 64 billion, implying that households have a long
position in FX. Nevertheless, on an individual basis, as those with FX liabilities and those with
FX assets may be different, in the event that the Turkish lira depreciates, it is clear that the debt
service capacity of those with FX liabilities and no FX incomes will be adversely affected.
The ratio of total financial liabilities of households to their assets did not change at end-
2009 compared to end-2008. However, this ratio went up to 35.8 percent as of March 2010
as the increase in liabilities outpaced that of assets (Chart I.40).
Household indebtedness in Turkey is still low compared to many countries. Moreover,

the interest rate and exchange rate risks of household liabilities are limited, which alleviates
the vulnerability of households. Slowdown in production driven by the global crisis exerted
pressure on employment and decreased the repayment capacity of households. Nevertheless,
the non-agricultural unemployment rate assumed a downward trend starting from the second
quarter of 2009 and the NPL ratio began to decrease since the last quarter of 2009, albeit
to a limited extent; both being positive developments. Yet, since the unemployment rates may
remain high for a while compared to pre-crisis periods, it is likely that households may be
facing repayment difficulties in the coming period.

31
I.4.2. Corporate Sector
I.4.2.1.Financial Debts of the Corporate Sector and the Development of Foreign

Exchange Position
The corporate sector financial debt became TL 358 billion as of March 2010 and the
share of FX-denominated loans is on the decrease, but still remains important.
FX borrowings of the corporate sector, which were USD 146.4 billion at end-2008,
went down to USD 142 billion at end-2009 and to USD 141.7 billion in March 2010. TL-
denominated loans extended to firms started to increase as of the last quarter of 2008 and
reached TL 135.2 billion and TL 142.4 billion at end-2009 and in March 2010, respectively
(Table I.9).
Table I.9. Financial Debt of the Corporate Sector1 (Million TL)
2007 2008 06.09 09.09 12.09 03.10

Corporate Sector Loans (I+II) 246,555 345,968 340,495 341,079 346,471 358,049
I. Domestic Loans (i+ii) 153,322 193,223 191,988 199,541 208,296 222,399
i. TL 105,783 123,203 127,403 131,809 135,210 142,377

80,0223
ii. FX (including FX-Indexed) 47,539 70,020 64,585 67,732 73,086
In USD terms 41,007 46,011 42,359 45,858 49,140 52,594
II. External Loans 93,232 152,745 148,507 141,538 138,175 135,650
In USD (A+B) 80,421 100,372 97,401 95,828 92,903 89,155
A. Short Term 1,012 1,508 1,038 959 712 906
B. Long Term (a+b+c+d) 79,409 98,864 96,363 94,869 92,191 88,249
a. Official Creditors (Gov. and Multilateral Org.) 2,734 2,986 3,166 2,887 2,756 2,593
b. Foreign Branches and Affiliates of Resident Banks 26,997 37,050 35,029 33,515 32,753 31,262
c. Nonresident Com. Banks and other fin. Inst. 42,819 50,476 49,840 50,188 48,346 45,832
d. Nonfinancial Institutions 6,859 8,352 8,328 8,279 8,337 8,563

2
Total FX Loans (Million USD) 121.428 146.383 139.760 141.686 142.043 141.749
Source: BRSA-CBRT
(1) Amounts in the table may be different from those published in the preceding issues due to the updates of the data.
(2) Although TL loans received from abroad are included, they are ignored since their amount is very low.
(3) Provisional data.
Following the amendment made to Decree Number 32 on June 16, 2009, loans obtained
from foreign branches and affiliates of banks established in Turkey and FX loans obtained from
foreign banks went down by USD 3.7 billion and USD 4 billion, respectively by March 2010
(Table I.9).

32

Currency Composition of Loans Received by Currency Composition of FX Loans
the Corporate Sector (%) Received by the Corporate Sector (%)
100 100
80 80 44 43 42 41
45
57 61 60
64 63
60 60
40 40
56 57 55 58 59
20 43 39 40 20
36 37
0 0
2007 2008 06.09 12.09 03.10 2007 2008 06.09 12.09 03.10
TL FX From Turkey From abroad
The share of FX loans within total cash loans, which was on the rise until 2008, went
down as a result of exchange rate movements and the economic crisis and has hovered around
61 percent since September 2009 (Chart I.41). The decline in FX loans was mainly attributable
to the fall in external borrowings.
FX loans extended to the corporate sector by domestic and foreign branches and affiliates
of Turkish banks increased by USD 6.5 billion compared to June 2009 and reached USD 83.9
billion in March 2010, which led the share of domestic FX loans within total FX loans to become
59 percent (Chart I.42, Table I.9).

Remaining Maturity Composition of Long-Term Interest Composition of Long Term Loans
Loans Received from Abroad by Corporate Received from Abroad by Corporate Sector (%)
Sector (%) (March 2010) (March 2010)
30.7
27.1
42.9
30.1
69.3
1 - 12 Months 13 - 36 Months 36 + Months Fixed Rate Loans Floating Rate Loans
By March 2010, 27.1 percent of the long-term external borrowings

obtained by the corporate sector were those with a maturity of up to one-
year and were 2.9 points less than their end-2008 level (Chart I.43).
By March 2010, 30.7 percent of the long-term loans obtained by the corporate sector
from abroad were fixed rate, whereas 69.3 percent were floating rate (Chart I.44).

33
Table I.10.
FX Assets and Liabilities of Corporate Sector1,2(Million USD)
Change Change
2007 2008 03.09 06.09 09.09 12.09 2008-2009 06.09-12.09
(%) (%)
Assets 76,130 81,364 77,763 80,088 82,175 80,762 -1 1
A. Deposit 54,795 60,357 57,041 58,576 60,136 57,269 -5 -2
3
-Domestic Banks 24,402 27,261 25,092 27,133 28,991 29,833 9 10
4
-Foreign Banks 30,393 33,096 31,949 31,443 31,145 27,436 -17 -13
B. Securities 830 695 636 801 822 992 43 24
C. Export Receivables 10,314 8,591 8,312 8,552 8,906 9,989 16 17
D. Foreign Dir. Invest. to Abr. 10,191 11,722 11,774 12,159 12,311 12,512 7 3
Liabilities 139,275 160,801 151,490 152,893 155,970 157,414 -2 3
A. Cash Loans 119,458 144,074 136,583 137,630 139,497 140,274 -3 2
5,6
-Domestic 41,007 46,011 42,045 42,359 45,858 49,140 7 16
7
Non-bank Fin. Inst. 8,220 8,576 7,849 8,213 8,156 7,985 -7 -3
8
-Foreign 78,451 98,063 94,538 95,271 93,639 91,134 -7 -4
B. Import Payables 14,519 14,673 13,435 13,799 14,584 15,282 4 11
C. Prot. Receivables of SDIF 5,298 2,055 1,472 1,464 1,890 1,858 -10 27
Net Position -63,145 -79,437 -73,727 -72,805 -73,795 -76,652 -4 5
Source: CBRT
1) Amounts in the table may be different from those published in the preceding issues due to the updates of the data.
(2) Data on non-financial public enterprises is not included.
(3) Participation funds in participation banks are included.
(4) “Deposits-Foreign Banks” data covers the data of foreign branches of the banks established in Turkey. On the other hand, it should be taken into consideration that the deposits of real
persons and non-bank financial institutions may be included in this data. December 2009 data is provisional.
(5) Funds extended by participation banks are included.
(6) FX indexed loans are included.
(7) It consists of leasing, factoring and consumer finance companies.
(8) Loans extended by foreign branches of the banks established in Turkey are included.
The FX short position of the corporate sector, which started to decline in the last quarter
of 2008, has re-surged since the second half of 2009. At end-2009, deposits of non-financial
sector firms in banks abroad dropped by 13 percent compared to June 2009 while the cash
loans they obtained from domestic banks increased by 16 percent, resulting in a 5 percent
increase in their net FX short position (Table I.10).
Chart I.45.
Ratios Related to FX Position of the Corporate Sector1,2,3 (%)
120
107.0 105.0
104.5 102.5
98.9
90 82.6
53.7
60 52.9
47.8
43.8 45.2 44.4
30
12.7 13.0 11.9 11.7 12.0
8.7
0
IV-07 IV-08 I-09 II-09 III-09 IV-09
Short Position / GDP Short Position / Export of Goods&Services Short Position / International Reserves
Source: CBRT, TURSTAT

(1) GDP and exports and services revenues are computed on a yearly basis. International reserves are outstanding amounts at the end of period.
(2) International reserves are gross foreign exchange reserves of CBRT (including gold).
(3) The short position amount is converted into TL using the foreign exchange rate of the related period and divided by GDP.

34
The ratio of the short position of the corporate sector to GDP and international reserves
decreased, whereas the ratio to exports and services revenues increased at end-2009 compared
to end-2008 (Chart I.45).
3
I.4.2.2. Profitability and Debt Structures of the Firms Listed on the ISE
The deceleration in global economic activity that started in the second half of 2008 led
to a contraction in the sales volume of firms. Total sales revenues of firms indicated an annual
decline of 8.8 percent in 2009. An analysis of the annual change in quarterly sales revenues
reveals that sales revenues, which started to decrease in the last quarter of 2008, rebounded
in the last quarter of 2009 and increased by 7.7 percent per annum (Chart I.46). Firms’ total
sales revenues decreased across 2009; however, that period’s profit went up by 20 percent
(Chart I.47).

Sales revenues (Annual % Change) Profit by Quarters (Annual % Change)
40
40
30
20
20
0
10
-20
0
-40
-10
-60
-20
-80
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
Quarterly Sum of four quarters

Sum of four quarters
Source: ISE-PDP Source: ISE-PDP
Contrary to the decline in sales, the profitability performance indicators of companies

improved along with the increase in the respective period’s profits . The return on assets, which
was 5.6 percent in 2008, went up to 6.3 percent in 2009; while return on equity increased from
11.7 percent to 12.7 percent (Chart I.48). The rebound in profitability performance of firms was
attributable to the surge in their profit margins. As a matter of fact, while the asset turnover ratio
dropped, the net profit margin, which was 4.9 percent in 2008, (respective period’s profit/ sales
revenues) climbed to 6.4 percent in 2009 (Chart I.49).
3
Data regarding the balance sheet and income tables of 185 firms listed on the ISE were aggregated to analyze developments in the corporate
sector’s profitability and debt ratios. Selected firms are those operating in the non-financial sector, excluding holding companies, sport service
sector’s companies and those operating in the secondary national, new economy and watch list market.
4
Income statement data is annualized by adding up the data for the last four quarters to calculate profitibality ratios.

35

Return on Equity and Assets (%) Asset Turnover Ratio (times) and Net Profit
Margin (%)
25 10 1.40
9
1.20
20 8
7 1.00
15 6
0.80
5
0.60
10 4
3 0.40
5 2
0.20
1
0 0 0.00
12.05
06.06
12.06
06.07
12.07
06.08
12.08
06.09
12.09
12.05
06.06
12.06
06.07
12.07
06.08
12.08
06.09
12.09
Net profit margin

Return on equity Return on assets Asset turnover ratio (right axis)
While the decline in firms’ financial expenses positively affected profit margins, no
improvement occurred in operational profits. Earnings before interest and tax (EBIT) margin
(EBIT / sales revenues), which was 8.9 percent in 2008, decreased to 8.8 percent in 2009
(Chart I.50). Meanwhile, firms’ financing expenses significantly decreased in 2009 as expenses
stemming from exchange rate differences went down. The ratio of net financial expenses to EBIT,
which was 29.1 percent in 2008, dropped to 11.5 percent (Chart I.51).

EBIT Margin (%) Financial Expenses (Net) / EBIT (%)
10 40
9 35
8
30
7
6 25
5 20
4
15
3
2 10
1 5
0
0
12.08
03.09
06.09
09.09
12.09
12.08
03.09
06.09
09.09
12.09
EBIT Margin
Financial expenses (net) / EBIT
The debt-equity balance, which started to deteriorate in 2008, assumed a trend of

recovery after the first quarter of 2009. The leverage ratio (debt/equity), which was 88.6 percent
at end-2007, reached 110.8 percent in 2008 and dropped to 102.4 percent at end-2009.

36
Meanwhile, short-term debt structures of firms are preserved and the share of short-term debt
within total debt was realized as 61.9 percent in 2009 (Chart I.52). Moreover, it is striking that
firms’ debt burdens are higher than those of the EU countries. According to the IMF Global
Financial Stability Report, the ratio of total debt to equity for firms in Europe became 89.5
percent in 2008.
Despite favorable developments in exchange rate risk indicators, the share of firms’ FX
debts and short positions still maintain their high levels. The share of FX debt within total debt,
which was 54.2 percent in 2008, went down to 51.7 percent in 2009, while the ratio of FX short
position to equity decreased from 28 percent to 21.7 percent (Chart I.53).

Leverage Ratio and Short Term Liabilities (%) FX Liabilities and Short Position (%)
140
60 0
120
50 -5
100 -10
40
80 -15
30
60 -20
40 20
-25
20 10 -30
0 0 -35
12.05
06.06
12.06
06.07
12.07
06.08
12.08
06.09
12.09
03.07
06.07
09.07
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
Short-term debt / Total debt Foreign currency debt / Total debt
Total debt / Total eqity
Foreign currency net position / Total equity (right axis)
Along with the contraction in aggregate demand in 2009, firms’ sales revenues indicated
a decline. This decline adversely affected firms’ operational profits. In spite of these negativities
in sales revenues, firms’ operational profits displayed a year-on-year increase in 2009. This
was triggered by the decline in financial expenses led by foreign currency gains parallel to the
appreciation of the Turkish lira. Despite the assessment that the debt problem that emerged in
Europe coupled with the depreciation of the Euro will slightly decelerate the trend of recovery in
the economy, a mild rebound is expected in firms’ sales revenues in 2010. As a matter of fact,
sales revenues started to improve in the last quarter of 2009.
As a conclusion, it is highly probable that especially firms’ operational profits will go up
and debt service capacities will improve in 2010. Dollarization of the liabilities of firms and their
high FX short position keep exposing the debt burden and profitability performance vulnerable
to exchange rate movements. This trend points to the fact that the pre-crisis vulnerability of firms
still continues.

37
Box 6.
Foreign Exchange Position of Corporate Sector Firms Listed on the ISE
This section analyzes the foreign exchange positions of corporate sector firms listed on the
Istanbul Stock Exchange1.
Chart 1.
FX Position of ISE Companies1,2 (Billion USD)
0
-4
-8
-12
-16
07 08 03.09 06.09 09.09 12.09
Sector Exporter Companies Companies with Short Position > 50 million USD
Source: ISE-Public Disclosure Platform

(1) As of year-end periods, companies for which the share of exports in net sales is equal to or greater than 30 percent, are considered exporter companies.
(2) Off-balance sheet positions are included since end-2008.
While, as of end-2008, 130 of 176 firms analyzed had short positions, this number
decreased to 121 at end-2009. The short position of these firms, which amounted to USD
14.2 billion at end-2008, fell to USD 12.2 billion at end-2009.
While the number of firms with a short position over USD 50 million was 41 at end-2008, it
decreased to 33 by end-2009. While the short position of these firms was USD 12.8 billion at
end-2008, it fell down to USD 10.8 billion by end-2009. The short position of non-exporting
firms, which was USD 7.5 billion at end-2008, increased to USD 8.1 billion at end-2009
(Chart 1).
(1) The analysis covers 176 non-financial firms, which disclose their foreign exchange positions in their balance-sheet footnotes, and do not include
any financial institutions in their consolidated financial statements. Firms that are consolidated under another company, the shares of which are publicly
traded at ISE, have not been re-included in the analysis. Moreover, firms, functional currency of which is foreign currency, firms, which possess special
accounting period and firms, stocks of which are de-listed from ISE markets temporarily, are excluded from the exchange rate risk analyses.

38
II. STRUCTURE OF THE FINANCIAL SECTOR
The total asset size of the financial sector, which maintained its growth in 2009, grew by
14 percent compared to the end of the previous year and reached TL 944 billion by the end of
2009. 88.4 percent of financial sector assets belong to banks (Chart II.1).
Chart II.1. Chart II.2.

Distribution of the Balance Sheet Size of the Development of the Banking Sector
Financial Sector (%)1 (Billion TL, %)
100 900 90
88.3
90 800 80
80
70 700 70
60
50 600 60
40
500 50
30
20 400 40
3.3 3.1 1.6 1.1 1.0 0.6 0.5 0.5 0.1
10
0 300 30
Securities Mut.Funds
Consumer Fin. Comp.

Insurance Comp.
Leasing Comp.
Factoring Comp.
200 20
Banks
Pension Funds
Intermediary Inst.
Securities Insves.
Real Estate Inves.
100 10
Funds
Funds
0 0
05 06 07 08 09
Total Assets
Total Assets/GDP (Right-hand Axis)
Source: BRSA,CBRT, TSPAKB,CMB Source: BRSA,CBRT,TURSTAT

(1) End-2009 data.
II.1. Banking Sector
The Turkish banking sector consists of deposit banks, development and investment banks,
and participation banks that operate according to profit/loss sharing principles.
The number of banks operating in the Turkish financial sector, which was 49 by end-
2009, remained unchanged in March 2010. The number of branches, which was 9,308 at
end-2008, increased by 271 to 9,579 in 2009 and later rose by another 20 to reach 9,599
by March 2010.
In 2009, the number of banking sector staff increased by 1,535 compared to end-2008
to become 184,205, whereas this number increased by 2,414 in the first three months of 2010
and reached 186,619 by March 2010.

39
By end-2009, the total asset size of the banking sector grew by 6.9 percent in real terms
compared to the end of previous year and reached TL 834 billion, while it climbed by 16.5
percent to 561 billion in USD terms. While the said figure increased by 3.2 percent in nominal
terms compared to end-2009, it decreased by 0.7 percent in real terms to TL 861 billion by
March 2010 and became 568 billion in USD terms with an increase of 1.3 percent.
Chart II.3.
Comparison of the Ratio of the Turkish Banking Sector Balance Sheet Size to GDP with Selected EU
Countries (%)1
Luxembourg (2541)
Ireland
United Kingdom
Denmark
Austria
Netherlands
France
Belgium
EU 27 Ave.
Euro Area
Germany
Spain
Portugal
Sweden
Italy
Finland
Greece
Latvia
Hungary
Bulgaria
Czech Republic
Lithuania
Turkey
Poland
Romania
0 100 200 300 400 500 600 700 800 900
Source: TURSTAT, BRSA, CBRT, ECB Report – 2009

(1) Data belongs to 2008.
The ratio of the Turkish banking sector’s asset size to GDP increased from 77.1 percent
at end-2008 to 87.4 percent at end- 2009 (Chart II.3). The share of the Turkish banking
sector within the GDP is higher than that of Poland and Romania, but lower than that of EU
countries.
Balance Sheet size of the Banking Sector by Composition of Banking Sector Assets by
Groups (%) Structure of Shares (%)1
100 3
42 3 3
3
3
4
3
4 100
90 20.1 18.6 20.7 19.6 20.4
80
80
12.4
70 22.4
25.6 24.0
24.8
60
60
94 94 94 93 93 50 36.5
40 31.0
40 28.9 28.9 28.5
30
20
20
31.0 28.0 25.6 25.9 27.2
10
0
0
05 06 07 08 09
Deposit Banks 05 06 07 08 09
Development and Investment Banks
Publicly Held Foreign Private State
Participation Banks
Source: BRSA-CBRT Source: BRSA-CBRT

1) For publicly held shares, no distinction i s made between domestic and foreign
investors.
By March 2010, of the 49 banks in the Turkish banking sector, 32 are deposit banks,
13 are development and investment banks and 4 are participation banks, thus pointing to the
prevalence of deposit banking in the Turkish banking sector (Chart II.4).

40
Based on their share in paid-up capital, the share of foreign stockholders in assets,
which was 25.6 percent at end-2008, was realized as 24 percent at end-2009 (Chart II.5).
Meanwhile, according to data of the Central Registry Agency, when the share of foreign
participation in publicly held shares, which stood at 17.9 percent, are included, the share of
foreign participation in the banking sector reaches 41.9 percent.
Table II.1 Comparison of Selected EU Countries1,2,3

Total Assets/ Share of Foreign
Number of Sector Share Number Stockholders in
Loan/ Loan/ Credit Agen- of the Top 5
Deposit/ GDP Deposit cies Credit Agen- of Credit the Banking
Countries GDP (%) (%) (%) (Million Euros) cies (%) Agencies Sector (%)
Germany 123 129 105 3,959 23 1,989 11.5
Austria 112 149 134 1,330 39 803 23.4
Belgium 157 117 74 12,116 81 105 26.9
Bulgaria 63 74 118 1,228 57 30 83.4
Czech Rep. 67 52 78 2,871 62 54 90.8
Denmark 82 238 290 6,385 66 171 17.5
Estonia 60 105 175 1,296 95 17 97.3
Finland 61 90 146 1,075 83 357 69.5
France 86 117 137 9,925 51 728 13.3
Holland 168 185 110 7,401 87 302 5.7
UK 285 282 99 22,609 37 391 50.9
Ireland 165 259 157 2,819 56 501 56.6
Spain 160 181 114 9,340 42 362 10.6
Sweden 56 130 231 4,944 62 182 9.4
Italy 76 115 152 4,436 33 818 12.1
Latvia 58 99 172 949 70 34 67.8
Lithuania 35 65 186 316 81 84 84.8
Luxembourg 718 553 77 6,129 27 152 95.2
Hungary 52 72 139 633 55 197 60.4
Poland 42 44 103 370 44 712 71.7
Portugal 127 170 133 2,756 69 175 22.1
Rumania 29 37 126 1,966 54 43 79.4
Slovakia 62 47 76 2,520 72 26 92.8
Slovenia 57 93 164 2,042 59 24 30.8
Greece 116 91 78 7,000 70 66 22.2
Euro Area Avrg. 117 138 118 4,653 45 438 18.7
EU 27 Avrg. 134 154 115 4,960 44 315 26.4
Turkey 2008 48 40 84 7,008 60 49 25.6
Turkey 2009 54 43 81 7,944 60 49 23.9
Source: BRSA-CBRT, Eurostat, ECB Report – 2009

(1) The table includes 2008 data of the EU countries. The meaning of the term “Credit institution” varies by the EU countries and some include non-credit institutions as well. As for Turkey,
data pertaining to banks are considered.
(2) Regarding Turkey, participation funds are included in deposit data and funds extended by participation banks in credit data.
(3) Parallel to the data for the EU, non-performing loans and financial leasing receivables are also included in the data for the credits in Turkey.
The ratios of deposits and loans to GDP, which reveal the financial depth and intermediation
level of the banking sector, kept increasing; while the ratio of loans to deposits decreased in this
period. The said ratios lag behind the EU averages.
The share of the first five banks within the total assets is above the EU average (Table II.1).
Meanwhile, as of end-2009, the concentration ratios of the first five and the first ten banks were
realized as 60 percent and 83 percent, respectively, and these ratios remained unchanged in
comparison to end-2008.

41
Box 7. Systemically Important Financial Institutions
As it has been experienced during the recent global crisis, bailing out systemically important
financial institutions (SIFIs) in case of a failure imposes severe costs on the public. Using the
advantage of their large sizes, SIFIs can borrow at lower costs, operate with higher leverage
ratios and engage in riskier activities seeking higher profits. Additionally, the market conception
of their being “too big to fail” and the provision of government support to those institutions
create the problem of “moral hazard”. For this reason, in their meeting in Pittsburgh, leaders
of G-20, called on the Financial Stability Board (FSB) to work on and propose measures to
address the risks associated with SIFIs.
In their joint work on “Assessing Systemic Importance” in October 20091 the IMF, BCBS,
and the FSB consider size, interconnectedness and substitutability as the three criteria to assess
the systemic importance of an institution. Within this framework, as a mesure of size, indicators
such as the share of financial intermediary operations (such as total assets to GDP ratio, the
share in interbank market, the dominance in a market segment for different loan types etc.); as
a measure of interconnectedness, the exposures to financial institutions and markets, share in
payment and settlement systems; and finally as a measure of substitutability, main indicators of
concentration in the literature such as the Hirschman-Herfindahl index comes into prominence.
However, it has been highlighted that indicators of financial vulnerabilities such as high leverage,
liquidity risk, and maturity mismatch; and indicators of financial infrastructure (the operation
of payment and settlement systems, bankruptcy regulations etc.) should also complement
those three criteria. Within this framework, along with problems such as the shortcomings and
disharmony in global coordination of information sharing, the overlapping nature of these
principles and criteria, and the difficulty of comparing them complicate distinguishing the
systemically important institutions at first place.
International Studies on Systemically Important Institutions
In addition to the Standing Committee on Supervisory and Regulatory Cooperation of the

FSB, the issue of mitigating the risks arising from systemically important financial institutions
is being discussed in two other platforms: Basel Committee on Banking Supervision (BCBS)
and the IMF. FSB is developing policy reforms by taking into account the moral hazard risk
that might stem from these institutions. BCBS, through its working group, is working on setting
crtiteria to distinguish SIFIs and proposing regulatory measures of capital and liquidity for SIFIs.
On the other hand, IMF, as it has been tasked by the G-20 in the Pittsburg Summit, is carrying
out a study on how to share the burden associated with government interventions in support of
the financial system during the crisis period. The study is based on the important contribution
that SIFIs are expected to make in case of a burden sharing considering their share in the
financial sector, their capacity to create systemic risk and the costs they might impose on public
finance in case of a failure. Regarding this burden sharing arrangements, the IMF proposes a
set of measures including systemic taxes and levies. The interim report of the work that is being
carried out under the coordination of the FSB will be presented to the G-20 meeting in June
and the final recommendations will be made in the November meeting. The studies in this area
has three main aims:
(1) http://www.financialstabilityboard.org/publications/r_091107c.pdf

42
i) Reducing the probability and impact of a SIFI failure through strengthening the regulatory
framework: The policy measures in this area includes additional capital and liquidity requirements
as well as more extensive and costly prudential requirements for SIFIs, contingent capital, more
effective micro and macro prudential policy implementations and steps towards reducing the
riskiness of SIFIs. Within this framework, the measures (strengthening the definiton of capital,
leverage and liquidity ratios etc.) proposed by the BCBS towards increasing the resilience of the
financial sector are expected to contribute to limiting the risks that might arise from SIFIs.
ii) Improving the resolution capacity of the cross-borderly active SIFIs: Studies are being
carried out in the international platform on policies to improve the systematic resolution capacity
of a problem institution and ex-ante crisis preparedness, emergency planning, cooperation and
information sharing among authorities, the resolution of large institutions within the framework
of the current national regulations, the interactions of national resolution frameworks.
iii) Reduction of contagion risks through strengthening the core financial infrastructures and
markets: Contagion risks arising from large financial institutions could be reduced not only
through limiting their exposures by imposing additional capital and other requirements but
also through strengthening the financial infrastructures which link those institutions. Within this
framework, work is underway on assessing and strengthening the standards on systemically
important market infrastructures.
Turkey’s Position Regarding Systemically Important Institutions
It is possible to discuss the SIFIs from the perspective of Turkey in two aspects. Firstly,
considering the position of SIFIs in Turkey, internationally active banks, which are systemically
important in their home countries, are established as subsidiaries in Turkey easing their
resolution in case of a crisis. The share of banks, which operate as branches, is significantly
low. Moreover, all the banks, including the branches of foreign banks in Turkey, are subject
to Banking Law No: 5411. Such institutions are being closely monitored due to the possible
contagion effects even though they do not pose systemic risk to the Turkish financial system.
Second aspect is about the situation of systemically important financial institutions that can
be characterized as SIFIs among the institutions operating in Turkey. In Turkey, banking sector,
with its share of 88 percent, constitutes the most significant part of the financial sector. Among
the 49 banks operating in Turkey, 10 banks have an asset share of 83 percent in total. These
institutions, considering their size, potential to lead to systemic risk and important role in the
payment systems, are closely monitored by the related authorities and are subject to efficient
supervision and regulation. The current regulations do not encourage the creation of SIFIs
and do not inhibit dealing with risks arising from those institutions. From a liquidity and capital
adequacy point of view, all banks, whether small or large, are monitored within the framework
of the current legal regulations. In Turkey, the framework for the resolution of problem banks
and conditions of entry to and exit from the system are regulated in detail. Moreover, relevant
authorities are actively involved in the international studies that are underway.

43
On the other hand, it is believed that provision of active entry and exit conditions, which are
essential for every sector, without creating systemic risk would increase the long-term efficiency
of the sector and will contribute to having a balanced concentration structure. Another
important issue is the importance of economies of scale for developing countries like Turkey. As
the financial institutions grow, the system may deepen and the opportunities of financial access
may increase. Therefore, due attention should be given to the fact that any measures that will
be taken against SIFIs will not negatively affect the growth potential of financial institutions.
As it has been experienced with the global crisis, the main problem is not the excessive
growth of the institutions but the the fact that regulatory and supervisory authorities of especially
developed countries could not monitor and assess well enough the complex financial operations
in which such institutions were involved. Therefore, when dealing with the risks arising from the
SIFIs, the preferential tool should be the maintenance of the effectiveness of the regulatory and
supervisory framework.
The share of foreign stockholders in the banking sector was 19 percent in the Euro area
and 26 percent in EU27 at end-2008. As for Turkey, the said figure, which was 26 percent in
the same period, was above the average of the Euro Area; approximately at the same level with
the EU27 average and far below that of the new members of the EU (Table II.1).

Asset Structure of the Banking Sector (%) Liabilitiy Structure of the Banking Sector (%)
100 100
15 12 12 11 10 12 13 12
90 14 13
90
80 80 11 12 13 13 15
70 70
38 44 49 50 47 13 14 12 13 10
60 60
50 50
40
40
30 35 32 31 62 62 62 62 62
28 26 30
20
20
10
12 12 11 13 12 10
0
0
05 06 07 08 09
05 06 07 08 09
Other Assets Deposits Due to Banks
Loans (Excluding Non-Performing Loans)
Securities Other Liabilities Shareholders' Equity
Cash+CBRT+Interbank+Due from Banks
The share of loans, having the largest share in asset items, decreased by 3 points in
December 2009 compared to end-2008, while the share of securities increased by 5 points
to 31 percent. As of March 2010, the shares of both loans and securities increased by 1 point
compared to end-2009 (Chart II.6).
As of end-2009, the share of deposits as the largest source of external funds remained
unchanged and the share of due to banks decreased by 3 points to 11 percent, whereas the
share of other liabilities increased by 2 points to 15 percent. While the shares of deposits and

44
equity capital did not change as of March 2010 compared to end-2009, the share of due to
banks increased by 1 point (Chart II.7).
II.2.Banking Sector Profitability and Capital Adequacy
II.2.1.Profitability5
In 2009, there was an upsurge in the profitability of the sector. The increase in net profits
of the sector continued through the first quarter of 2010 as well. In 2009, net profits increased
by 50.4 percent year-on-year, to reach TL 20.2 billion. Annual net profits amounted to TL 21.3
billion by March 2010.
Return on equity and assets of the sector increased in 2009 parallel to the surging net
profit of the respective period. The sector was able to maintain the level of return on equity and
assets by March 2010 as well. Return on equity, which was 15.5 percent in 2008, reached to
18.2 percent in 2009. Return on assets, meanwhile, increased from 1.8 percent in 2008 to
2.4 percent in 2009 (Chart II.1). The hikes in asset turnover ratio and net profit margin were
instrumental in the increase in profitability ratios6. While the asset turnover ratio was 6.6 percent
in 2008, it went up to 7.5 percent in 2009. Meanwhile, the net profit margin increased from
27.6 percent in 2008 to 32.1 percent in 2009 (Chart II.9).
Return on assets and equity of the sector did not register a remarkable increase by March
2010 compared to end-2009 and were realized as 2.5 percent and 18.2 percent, respectively
(Chart II.1). Although the asset turnover ratio eased to 7.4 percent by March 2010, the surge in
the net profit margin to 33.4 percent enabled the sector to maintain the said level of return on
asset and equity (Chart II.9).

Return on Equity and Assets (%) Asset turnover and Net Profit Margin (%)
23 2.8 9 39
21 2.6 8 36
19 2.4
7 33
17 2.2
6 30
15 2.0
13 1.8 5 27
11 1.6 4 24
9 1.4 3 21
7 1.2
2 18
5 1.0
1 15
12.05
03.06
06.06
09.06
12.06
03.07
06.07
09.07
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
12.05
03.06
06.06
09.06
12.06
03.07
06.07
09.07
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
Net profit / Total equity

Total assets / Total equity Total income / Total assets
Net profit / Total assets (Right Axis)) Net profit / Total income (Right Axis)
5 In this section, financial ratios regarding income statement items are annualized by calculating their past 12-month-totals.
6 Return on equity (Net profit / Equity l) = Return on asset (Net profit / Asset) x (Asset / Equity; Retun on assets = Asset turnover (Income / Asset) x Net profit margin
(Net profit / Income); Asset turnover = (Net interest income + Non-interest income) / Asset; Net profit margin = 1 – [(Non-interest expenses + Loan loss provisions
+ Tax expenses) / Income]

45
In 2009, the sector cut its non-interest expenses in the face of the economic crisis.
This development, which increased efficiency, coupled with the surge in net interest margins
(net interest income/asset) favorably affected the sector’s profitability. The net interest margin
increased from 4.2 percent in 2008 to 5 percent in 2009. Due to the short-term structure of
deposits, the decline in interest rates led to an increase in the banks’ net interest margins. The
ratio of non-interest expenses to total assets became 2.5 percent in 2009 without a remarkable
change from end-2008 (Chart II.10). In 2009, the sector cut its personnel and operational
costs in particular, in order to increase its net profit margin. The ratio of non-interest expenses
to total income decreased from 54.6 percent in 2008 to 44.3 percent in 2009. Despite the
favorable performance of non-interest expenses, the surge in the sector’s loan loss provision
expenses limited the increase in the sector’s net profit margin. The ratio of loan loss provision
expenses to total income, which was 11.2 percent in 2008, climbed to 15.7 percent in 2009
(Chart II.11).
By March 2010, the net interest margin is seen to have begun to contract and the
decline in the ratio of non-interest expenses to total income is seen to have halted. Meanwhile,
the decline since the last quarter of 2009 in loan loss provision expenses has been positively
affecting the sector’s net profit margin and profitability performance. By March 2010, the net
interest margin went down to 4.9 percent; the ratio of non-interest expenses to total income
became 44.7 percent and the ratio of loan loss provision expenses to total income fell to 13.6
percent (Chart II.10 and Chart II.11).

Sources of Total Income (%) Ratio of Expenses to Total Income (%)
5.5 70
5.0 60
4.5 50
4.0 40
3.5 30
3.0 20
2.5 10
2.0 0
12.05
03.06
06.06
09.06
12.06
03.07
06.07
09.07
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
12.05
03.06
06.06
09.06
12.06
03.07
06.07
09.07
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
Net interest income / Total assets Non-interest expenses / Total income
Non-interest income / Total assets Loan loss provisions / Total income
As a result of the maturity mismatch, the fall in policy rates favorably affected the net
interest margins of the sector in 2009. Despite the increase in loan loss provision expenses,
the controlled behavior of the sector in non-interest expenses coupled with the surge in the net
interest margin triggered an improvement in profitability performance. In the first quarter of
2010, the favorable course of the sector’s profitability performance continued especially on
the back of the decline in loan loss provision expenses. However, parallel to the end of policy
rate cuts, the surge in net interest margins has come to a halt. Therefore, the level of profit

46
that the sector will be recording in 2010 is believed to emanate mostly from asset growth.
Considering the problems in Europe, any possible contraction in the external borrowing market
may exert an upward pressure on funding costs and may lead to an additional fall in interest
margins. Despite the adverse effect of the contraction in interest margins on profitability, the
improvement – as was the case in the first quarter of 2010 – in NPL ratios and the credit risk
outlook is expected to limit the sector’s loan loss provision expenses and continue to positively
affect the profitability performance.
Box 8. Net Interest Margin and Profitability
The policy rate of central bank, which stood at 16.75 percentages in October 2008, was
lowered 1025 basis point to 6.5 percent until November 2008. The fall in the policy rates
passed on to the interest rates of credit, government securities and deposits (Graph 1).
Chart 1. Interest Rates (%)

25
20
15
10
0
Policy Rate Cash Automobile Mortgage Corporate Government Deposits
Securities
October 2008 November 2009 March 2010
Source: CBRT
Although the decrease in policy rates affected the returns of the financial instruments, since
the maturity of total assets is longer than that of liabilities, the decline in the interest rates
passed on to the returns of assets with delay and this contributed to an increase in net interest
margins (Graph 2).
Chart 2.
Net Interest Margins and Policy Rate (Dec.05-Mar.10)
5.4
Net Interest Income / Assets(%)
5.2
5.0
4.8
4.6
4.4
4.2
4.0
5 7 9 11 13 15 17 19
Policy Rate (%)
Source: CBRT

47
Nonetheless, analyzing the time series of the profitability performance after 2005 indicates
that rather than net interest margins, management of operating expenses is the key variable
for return on assets and equity. Although the net interest margin is expected to narrow during
2010, the decline in the impairment costs will make positive contribution to the profitability.
Thus, taking into account the past experience, effective management of operating expenses will
be important for sustaining the profitability performance of the sector during this year.
Table 1. Correlation Coefficients

ROE ROA
Total income / Total assets -0.12 0.18
Net interest income / Total assets 0.07 0.31
Non-interest income / Total assets -0.14 -0.12
Net income / Total income 0.98 0.98
Non-interest expenses / Total income -0.72 -0.81
Impairment cost / Total income -0.09 0.03
Source: BRSA - CBRT
Box 9. Profitability Performance and Country Comparison
Although the accounting standards may differ across countries, the analysis of the profitability
indicators of the US, EU and Turkish banking sectors shows the following:
1. The US banks had a higher return on assets than European banks, but the return on
equity was close to each other.
2. The net interest margin was wider in US than Europe.
3. The US banks were more successful than European banks in limiting their operating
expenses relative to their total income.
4. Turkish banks had higher net interest margins, return on assets and equity than the US and
European banks. Meanwhile, Turkish banks managed to control their non-interest expenses as
a share of total income more successfully than the European and the US banks did.

48
Table 1. Profitability Comparison Across Countries
Return on equity Return on assets Net interest mar- Non-interest

(%) (%) gin (%) expenses / Total
income (%)
European Union
2003 11.3 0.5 1.5 73.1
2004 13.5 0.5 1.2 64.8
2005 14.4 0.5 1.0 60.9
2006 15.6 0.6 0.9 59.8
2007 12.9 0.5 0.9 63.0
2008 -6.0 -0.2 0.9 76.1
Average 10.3 0.4 1.1 66.3
Standard Deviation 8.1 0.3 0.2 6.7
United States
2003 15.3 1.4 3.8 56.5
2004 13.7 1.3 3.6 58.0
2005 12.9 1.3 3.6 57.2
2006 13.0 1.3 3.4 56.3
2007 9.1 0.9 3.4 59.2
2008 1.3 0.1 3.3 58.4
Average 10.9 1.1 3.5 57.6
Turkey
2003 15.8 2.2 4.5 54.3
2004 14.0 2.1 5.8 58.0
2005 10.9 1.5 4.6 62.9
2006 19.1 2.3 4.2 53.1
2007 19.6 2.6 4.5 51.2
2008 15.5 1.8 4.2 54.6
Average 15.8 2.1 4.6 55.7
Source: IMF Global Financial Stability Report, April 2010
5. In addition, the return on assets and equity were 0.1 percent and 0.9 percent respectively
in 2009 for US banks. On the other hand, the return on equity for European large and complex
banking groups stood at 8 percent as of June 2009. Therefore, it is possible to indicate that the
profitability of the European banks recovered in 2009. The profitability performance of Turkish
banks continued to improve during 2009. The return on assets and equity for Turkish banks
rose to 2.5 percent and 18.2 percent respectively in 2009.

49
II.2.2.Capital Adequacy
While the high profits gained by the banking sector especially in 2009 underpinned its
regulatory capital, the deceleration of credit growth and increasing public securities investments
limited growth in risk-weighted assets. Against this background, the capital adequacy ratio of
the banking sector, which was 18 percent in 2008, increased to 20.6 percent in 2009, while the
Tier 1 ratio increased from 16.8 percent to 18.5 percent in the same period7. In March 2010,
while regulatory capital increased by 4.5 percent to TL 120.5 billion compared to end-2009,
the sum of risk-weighted items went up by 8.1 percent to TL 604.2 billion. As the increase in the
sum of risk-weighted items exceeded the increase in regulatory capital, the capital adequacy
ratio indicated a decrease compared to end-2009 and went down to 19.9 percent in March
2010 (Chart II.13). The surge in risk-weighted items at the start of 2010 was attribuTable to
exposure stemming from operational risk and hikes in bank loans.
While the capital adequacy ratio of 45 banks, the asset share of which were 97.3 percent,
exceeded 15 percent at end-2009; that of 44 banks with 88.5 percent asset share exceeded 15
percent in March 2010. Meanwhile, asset shares of banks with capital adequacy ratios between
8 and 15 percent went up from 2.7 percent to 11.5 percent (Chart II.12).
Chart II.12.
Asset Shares of Banks Based on Capital Adequacy Ratios (%)
100
90
29 Banks
80
25 Banks
70
21 Banks
60
50
8 Banks
40
5 Banks
30
21 Banks
19 Banks
16 Banks
4 Banks
20
10
0
8<CAR<15 15<CAR<30 CAR>30
December 2008 December 2009 March 2010
Source: BRSA-CBRT
Besides the risk-based regulatory capital adequacy ratio, the balance-sheet-based equity
capital ratios are also at high levels in the Turkish banking sector. In 2009, the equity capital of
the banking sector grew stronger parallel to higher profits and rising differences in securities’
valuation due to falling interest rates. The share of total equity capital and free capital in the
balance sheet increased by 1.5 points and reached 13.3 percent and 10 percent, respectively.
In March 2010, the trend of increase in the share of equity capital and free capital within the
balance sheet continued and their shares became 13.6 percent and 10.3 percent, respectively
(Chart II.14).
7 Capital Adequacy Ratio= Regulatory Capital / Risk Weighted Assets; Tier I Ratio= (Tier I Capital - 0.5*Deductions )/Risk Weighted Assets

50

Capital Adequacy and Tier 1 Ratio (%) Equity and Free Capital (%)
26 15
14
24
13
22 12
11
20
10
18 9
8
16
7
14 6
12.05
03.06
06.06
09.06
12.06
03.07
06.07
09.07
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
12.05
03.06
06.06
09.06
12.06
03.07
06.07
09.07
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
Total equity / Total assets
Overall CAR Tier 1 ratio
Free capital / Total assets
The banking sector is mainly exposed to credit risk. By March 2010, 81.4 percent, 4.6
percent and 14.1 percent of total risks consist of exposure stemming from credit risk, market
risk and operational risk, respectively (Chart II.15). Recently, parallel to increasing profitability
performance of the banking sector, the share of the amount exposed to operational risk within
total risks has also increased, while the share of the amount exposed to credit risk decreased.
The tendency of the banking sector to avert risks has been instrumental in easing the amount
exposed to credit risk. The ratio of risk-weighted items to total assets decreased from 70.4
percent in 2008 to 67 percent in 2009; and the average credit risk weight, which was 58.3
percent in 2008, went down to 56.5 percent in 2009 (Chart II.16). Nevertheless, by March
2010, the ratio of risk-weighted items to total assets increased to 70.2 percent and the average
credit risk weight reached 58.8 percent, which indicates that the risk-averse behavior has eased
(Chart II.16).

Distribution of Risk-Weighted Items (%) Risk-Weighted Items and Average Credit Risk
Weight (%)
100 75
90 73
80 71
70 69
60
67
50
65
40
63
30
61
20
59
10
0 57
55
12.08
01.09
02.09
03.09
04.09
05.09
06.09
07.09
08.09
09.09
10.09
11.09
12.09
01.10
02.10
03.10
12.08
01.09
02.09
03.09
04.09
05.09
06.09
07.09
08.09
09.09
10.09
11.09
12.09
01.10
02.10
03.10
Average credit risk weight

Credit risk Market risk Operational risk Risk weighted assets / Total assets

51
While elevated profitability in 2009 contributed to strengthening the equity capital of the
sector, the increase in public securities investments restricted growth of risk-weighted assets and
capital adequacy ratios went up. Meanwhile, the increase in risk-weighted assets parallel to the
rebound in credit markets in 2010 may lead to a slight decrease in capital adequacy ratios,
which are still high compared to other countries.
Box 10. Basel Commitee on Baking Supervision and Regulations on Capital

Adequacy
Following the global financial crisis, Basel Committee on Baking Supervision started to work
on new regulations aimed at strengthening and increasing the shock absorption capacity of
banks’ capital. The following are currently being discussed regarding the capital adequacy of
banks:
• Improving the quality of capital: The share of issued common shares and retained
earnings in total regulatory capital is low for many banks operating in developed
economies. Hybrid capital, which has characteristics of both debt and equity, constitutes
a significant part of their capital for these banks. Therefore, Basel Committee on
Banking Supervision is currently working on a new draft that aims to improve the quality
of capital in order to increase the loss absorption capacity of total capital. According to
the new draft, the debt instruments that may be a component of total regulatory capital
should also have a feature of conversion to equity during periods of financial distress.
• Leverage ratio: During the global crisis period, it was noticed that many banks that
were in trouble was too leveraged although their capital adequacy ratio was high. Basel
Committee is considering introducing a new leverage ratio that will supplement the risk
based capital ratios.
• Counter-cyclical capital buffer: In the current capital adequacy regulation, the minimum
required ratio is 8 percent. With the new draft regulation, the minimum ratio will be
increased during periods of economic boom and decreased during periods of economic
bust. Therefore, it is aimed to accumulate additional reserves in periods of economic
growth that will be used to absorb the losses in periods of economic cantraction. This
will enable banks to continue their loan growth and limit the contraction of the economy
during downturns.
Compared with other banks, Turkish banks have stronger capital and lower leverage. The
capital adequacy ratios of European and US banks are around 11 and 12 percent respectively.
For Turkish banks, compared to the past, there has been a decline in capital adequacy ratios
due to loan growth and changes in regulatory framework with the aim of convergence to
international standards. However, it has stood around 20 percent in recent years. Taking into
account the differences in regulatory frameworks across countries, accounting based leverage
ratios give valuable information on the international comparision of capital adequacy. In

52
addition to higher capital adequacy ratios, the lower leverage ratios of Turkish banks are also
noticeable. The total assets of European banks are approximately 30 times of their equity
and it is 10 times for US banks. For Turkish banks, this is only 7-8 times. Thus, the higher
capital adequacy ratios and the lower leverage make Turkish banks decouple from the banking
sectors of many other countries. This will ease Turkish banking sector’s adjustment to the new
regulatory environment, which will increase the minimum required capital for banks.
Table 1. International Comparison of Capital Adequacy Indicators
Capital Adequacy Ratio (%) Leverage Ratio (Assets / equity)

European United States Turkey European United States Turkey
Union Union
2003 12.4 12.8 30.9 34.5 10.9 7.0
2004 11.9 12.6 28.8 28.6 9.9 6.7
2005 11.4 12.3 23.7 27.0 9.7 7.3
2006 11.1 12.4 21.9 27.0 9.8 8.4
2007 11.4 12.2 18.9 27.8 9.8 7.7
2008 11.7 12.7 18.0 35.7 10.6 8.5
Source: IMF Global Financial Stability Report, April 2010 and Banking Sector Stability Report, ECB.
It should be taken into account that regulatory framework for capital adequacy may
vary across countries and European banks and the large banks in US implement Basel II.
Convergence to Basel II in our country has already been preceded. For the implementation of
Basel-II standards in our country, various regulation drafts were prepared based on EU Acquis
and disclosed to public for discussions on April 6, 2010. While, relating to measurement of
credit risk in the said drafts, only measurement methodology based on standard approach
were included; it is planned to put into effect the measurement methodology based on internal
grading in forthcoming periods.

53

54
III. BANKING SECTOR RISKS
III.1. Credit Risk and Scenario Analysis
III.1.1. Credit Risk
The recovery in economic activity triggered by the measures taken to curb the effects of
the global financial crisis, the improved risk perceptions of banks and the low course of loan
interest rates enabled the maintenance of a gradual recovery in the credit growth rate since
the last quarter of 2009. The relative strengthening of firms’ debt service capacity coupled with
improving employment halted the increase in non-performing loans (NPL).
Chart III.1. Chart III.2.

Gross Loans (Billion TL,%) 1,2 Real Growth in Gross Loans by Groups (%) 1,2
50
450 45
400 40 40
350 35
30
300 30
250 25 20
200 20
10
150 , 15
100 10 0
50 5
-10
0 0
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
State Private
Gross Loans Foreign Participation
Real Growth in Gross Loans (Right Hand Axis)
Source: BRSA –CBRT Source: BRSA –CBRT
(1) Expressed in real terms using CPI (1994=100). (1) Expressed in real terms using CPI (1994=100).
(2) Year-on-year percentage change. (2) Year-on-year percentage change.
The growth rate of credits extended by the banking sector in Turkey lost pace due to the
global economic crisis (Chart III.1). Analyzed by bank groups, this slowdown in all bank groups
remains limited in public banks; whereas it is more accelerated in foreign and private banks.
Following a fairly limited decrease, the credit growth rate in participation banks went up in
contrast to other bank groups, also due to their inability to invest in interest earning instruments.
Parallel to the favorable developments in economic activity since the last quarter of 2009, the
credit growth rate in all bank groups gained pace and the gross credit volume reached TL 438.2
billion in March 2010 (Chart III.1 and Chart III.2).

55
Table III.1. Selected Credit Ratios,1 (Million TL, %)

2007 2008 2009 03.10
First 5 Banks
Total Gross Loans 162,452 211,543 216,948 230,736
Share in Total Gross Loans 54.9 55.5 52.3 52.6
NPL / Total Gross Loans 3.8 3.7 4.7 4.1
Gross Loans / Deposits 88.8 89.4 67.8 69.0
Provisions / NPL 89.5 84.8 90.2 88.9
First 10 Banks
Share in Total Gross Loans 80.0 81.1 80.0 80.2
Provisions / NPL 89.4 83.5 87.8 86.7
Sector
Provisions / NPL 86.8 79.8 83.6 82.9
Source: BRSA-CBRT
(1) The first 5 and 10 banks ranked according to their gross loans.
The loans to deposits ratio of the banking sector, which has been on the decrease since
end-2008, rose to 82 percent in March 2010 thanks to the recovery in loans (Table III.1). The
inclusion of a public bank with a high level of deposits in the first five banks with the highest
loan portfolio was instrumental in the decrease in the loan/deposit ratio of the first five banks
at end-2009.

Non-Performing Loans (Billion TL, %) 1 Non-Performing Loans, Provisions and
Collaterals (Billion TL)1
30
25 6
20 5 25
15 4 20
10 3 15
5 2 10
0 1 5
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
0
Loans and Other Receivables with Limited Collectibility
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
Doubtful Loans and Other Receivables

Loans and Other Receivables Classified as Loss
NPL Ratio (Right Hand Axis) Guarantees Provisions NPL
Source: BRSA –CBRT Source: BRSA –CBRT

(1) NPL Ratio = Gross NPL / Gross Loan (1) Collaterals are calculated based on the relevant regulation.
The amount of NPLs, which reached TL 21.9 billion - its highest level - in November
2009, recorded a limited decline then onwards and went down to TL 21.4 billion in March
2010. This decline was attributable to the increased debt repayment capacity of the private

56
sector, sale of a part of the NPLs to asset management companies, write-offs, or collections.
Moreover, the NPL ratio, which was 5.4 percent in October 2009, decreased to 4.9 percent in
March 2010 due not only to the plummeting NPLs but also to the increase in the credit volume
(Chart III.3). The high provisioning policy implemented in the banking sector is considered to
be a positive development as regards credit risk management (Chart III.4).
Taking the improvements in economic growth, employment and credit volume into
consideration, it is believed that the trend of decline in NPL ratios will continue also in the
forthcoming period.
Table III.2. NPL Ratios in Selected Countries (%)
2007 2008 2009 Latest data

USA 1.4 2.9 5.4 December
Austria 2.2 1.9 2.3 September
Belgium 1.1 1.7 2.7 December
Brazil 3.0 3.1 4.5 October
Bulgaria 2.1 2.5 6.0 September
Czech Republic 2.8 3.3 5.3 December
Estonia 0.4 1.9 5.2 December
Croatia 4.8 4.9 6.4 September
United Kingdom 0.9 1.6 3.3 June
Ireland 0.8 2.6 7.5 September
Spain 0.9 3.4 5.1 December
Sweden 0.6 1.0 2.0 December
Italy 4.6 4.9 6.2 June
Latvia 0.8 3.6 16.4 December
Lithuania 1.0 4.6 19.4 December
Hungary 2.3 3.0 5.9 September
Poland 5.2 4.4 7.0 September
Portugal 1.5 1.9 2.8 June
Romania 4.0 6.5 14.8 October
Russia 2.5 3.8 9.6 December
Serbia - 11.3 15.5 December
Slovakia 2.5 3.2 4.3 October
Slovenia 1.8 1.8 2.3 November
Turkey 3.5 3.7 5.3 December
Greece 4.5 5.0 7.2 September
Source: IMF Global Financial Stability Report, April 2010, BRSA-CBRT
Among the group of Central and Eastern European countries, to which Turkey also belongs,
one of the lowest NPL ratios has been that of Turkey recently. The ratio for Latvia, Lithuania,
Serbia and Romania exceeded 14 percent in 2009 and the NPL ratios of other countries in this
group are higher than that of Turkey. Additionally, as for the developed economies, the NPL
ratios of Greece, Ireland and Italy are higher than that of Turkey (Table III.2).
If concerns over financial problems stemming from the public debt burden in some
European countries cannot be eliminated, the process of global recovery may slow down and
the NPL ratios of these countries may increase even more.

57
Box 11. Some Amendments to the Regulation on the Procedures and Principles
for Determination of Qualifications of Loans and Other Receivables by Banks and
Provisions to be set Aside
The period of implementation of the second and third provisional articles that were added to
the “Regulation on the Procedures and Principles for Determination of Qualifications of Loans
and Other Receivables by Banks and Provisions to be set Aside” with the amendment dated
January 23, 2009 was extended for a year with a new amendment dated March 6, 2010.
According to this amendment, until March 2011, it will not be mandatory for banks to set
aside provisions for the unproblematic loans of clients whose all outstanding loans have been
classified as “non-performing” due to their failure to meet the repayment obligations of at least
one other loan. Besides, in the event that banks collect overdue parts of loans in default, loans
classified as unproblematic may be classified in the First Group on condition that they are
monitored in the Second Group for a period of at least six months.
On the other hand, until March 1, 2011, loans classified in the Second Group may be
tied to a new redemption plan for two times before they are classified as non-performing.
Banks can also restructure their non-performing loans for a third time in the event that failure
to meet payments of these loans stems from temporary liquidity difficulties. Loans subject to a
new redemption plan may be classified in First and Second Groups provided that a specified
percent of the total sum of receivables has been repaid.
According to the new provisional article added to the mentioned regulation with this
amendment, banks that has capital adequacy ratio equal to or greater than 16 percent which
is measured from credit and market risk adjusted amount (except operational risk adjusted
amount) can set aside zero percent general provision for their cash credit excluding credit cards
from the publication date of this amendment to March 1, 2011.

Currency Composition Loans FX Loans (Billion, Excluding NPLs) 1,2
(%, Excluding NPLs)
140
100
80 120
60 100
40 80
20
60
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
0
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
FX Loans (TL)
FX Loans (USD)
Domestic Currency Loans FX-Indexed Loans FX Loans FX Loans (Basket)

(1) Converted to USD using the CBRT buying exchange rates as of month-end.
(2) FX basket is composed of 70 percent of the USD buying exchange rate and 30
percent of the Euro buying exchange rate.
In March 2010, 68 percent of total loans extended were Domestic Currency Loans
while, 27.1 percent and 4.9 percent were FX-denominated and FX-Indexed loans, respectively.
During the September 2008 – March 2009 period, the share of FX loans went up parallel to

58
the depreciation of TL and fluctuated in the range of 26.5-28 percent following this period.
Meanwhile, FX-loans in terms of USD and FX-basket have increased since the second half of
2009 (Chart III.5 and Chart III.6).
Chart III.7.
Distribution of Loans by Provinces (%) 1
75
49.2
47.2 46.7 46.8
50
35.4 36.2 36.9

33.7
25
11.8 12.0 12.0 11.2

5.6 5.1 5.1 5.1
0
2007 2008 2009 03.2010
ISTANBUL ANKARA IZMIR OTHER
Source: CBRT
(1) Loans are compiled based on bank reporting under the scope of Central Bank Law No:1211, Article:44. They include corporate loans greater than 10 thousand Turkish Liras
(inclusive) and retail loans greater than 5 thousand Turkish Liras (inclusive); extended to real and legal bodies by banks (including external loans used by firms with the intermediation of
banks). They are inclusive of non-performing loans and accrued interest and exclusive of non-cash loans. Since October 2007, NPL’s are being disclosed on the basis of firms without
being subject to any limits.
The geographical breakdown of loans suggests that while the share of Ankara decreased
in March 2010 compared to end-2009, the share of other provinces within total loans increased,
excluding İzmir, where no change is observed (Chart III.7).
Chart III.9.
Chart III.8.
Spread Between Corporate Loan and
Loan Interest Rates (%)1
Deposit Rates (%)1
12 24 9
11 22
8
10 20
7
9 18
6
8 16
7 14 5
6 12 4
5 10
3
4 8
2
3 6
1
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
04.10
0
FX Corporate Loans
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
04.10
Consumer Loans (Right Hand Axis)

TL Corporate Loans (Right Hand Axis)

(1) Weighted average flow interest rate. (1) Weighted average flow interest rate.
Although loan interest rates increased in October 2008 following the global crisis, they
fell below their September 2008 levels with the help of the CBRT’s interest rate cuts between
November 2008 and November 2009 (Chart III.8). The rising spread between commercial
loan-deposit interest rates, an indicator of tight loan conditions, which went up until February
2009, has levelled off at the 1-2 percent range since end-2009 (Chart III.9).

59

Breakdown of Gross Loans and Real Growth NPL Ratios of Corporate Loans and Retail
Rates (%) 1,2 Loans (%)1
100 40 7
80 30
6
60 20
5
40 10
4
20 0
3
0 -10
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
Retail Loans
Corporate Loans
Real Growth in Retail Loans (Right Hand Axis)
Real Growth in Corporate Loans (Right Hand Axis) Retail Loans Corporate Loans
Source: BRSA -CBRT Source: BRSA -CBRT
(1) Expressed in real terms using CPI (1994=100) (1) NPL Ratio = Gross NPL / Gross Loan
(2) Annual percentage change as compared to the same period of last year.
As of March 2010, 33 percent and 67 percent of total loans consisted of retail loans and
corporate loans, respectively. Mainly the contraction in corporate loans triggered the deceleration
in total loans in the post-crisis period; but these loans have increased due to the recovery in
economic activity and the improvement in risk perception of banks since the last quarter of 2009.
In March 2010, a year-on-year increase of 8.6 percent and 2.3 percent in retail loans and
corporate loans was seen in real terms, respectively (Chart III.10). In the crisis period, NPL ratios
of retail loans especially stemming from credit cards were above those of corporate loans and
the said ratios have been decreasing since the last quarter of 2009 (Chart III.11).

Corporate Loans by Type (Excl. NPLs, %) 1,2 NPL Ratios of Corporate Loans (%)1,2
100 45 8.0
90 7.5
80 30 7.0
70 6.5
6.0
60 15
5.5
50
5.0
40 0 4.5
30 4.0
20 -15 3.5
10 3.0
0 -30 2.5
2.0
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
SME Loans
Other Corporate Loans
Real Growth in SME Loans (Right Hand Axis) SME Loans Other Corporate Loans
Real Growth in Other Corporate Loans (Right Hand Axis) Total Corporate Loans
(1) Growth rates were brought to real terms by using CPI (1994=100). (1) NPL Ratio=Gross NPL / Gross Loans
(2) Annual percentage change as compared to the same period last year. (2) Other corporate loans calculated by subtracting SMEs from total corporate loans.
Due to the gradual decrease in the tightness in lending standards of banks, corporate
loans recovered and reached TL 280.3 billion in March 2010. 32.1 percent of these loans were
extended to Small and Medium Sized Enterprises (SME)8. Parallel to the recovery in economic
8 Enterprises that are included in the Regulation on ‘’Definition, Properties and Classifications of Small and Medium Sized Enterprises’’, prepared
by the Ministry of Industry and Trade and published in the Official Gazette dated 18.11.2005 and numbered 25997.

60
activity, these loans have been on the rise since the last quarter of 2009 (Chart III.12). Moreover,
the results of the CBRT Banks’ Loans Tendency Survey suggest that the highest increase in
demand in the forthcoming period is expected in SME loans.
A rapid increase was observed in NPL ratios owing to the significant contraction in the
loans extended to SMEs and the slowdown in the debt service capacity of these firms. However,
due to the recovery in economic activity and high growth expectations, loans extended to SMEs
have increased and NPL ratios have improved since the last quarter of 2009 (Chart III.13).
Box 12. Types of SME Loans

According to the Regulation on ‘’Definition, Properties and Classifications of Small and
Medium Sized Enterprises’’, prepared by the Ministry of Industry and Trade, which was published
in the Official Gazette dated November 18, 2005 and nr. 25997, SMEs are classified as
micro, small and medium sized enterprises considering number of employees and annual net
sales. Micro enterprise is defined as a business employing less than 10 persons and having
annual net sales revenue or a financial balance-sheet of up to 1 million TL, small enterprise is
defined as a business employing less than 50 persons and having annual net sales revenue or
a financial balance-sheet of up to 5 million TL, and medium-sized enterprise is defined as a
business employing less than 250 persons and having annual net sales revenue or a financial
balance-sheet of up to 25 million TL.
Chart 1. Chart 2.
Distribution of SME Loans NPL Ratios of SMEs (%)
(Excluding NPLs, Share % )
100 12
90
10
80
70 8
60
50 6
40
4
30
20 2
10
0 0
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
Micro Small Medium Micro Small Medium
Source: BRSA – CBRT Source: BRSA – CBRT

(1) NPL Ratio=Gross NPLs/ Gross Loans
Total amount of SME loans rose to 89.9 million TL as of March 2010 and the shares
of micro, small and medium sized enterprises were realized as 34.1 percent, 27.2 percent
and 38.6 percent respectively. Due to banks’ diminished risk appetite and worsened financial
conditions of SMEs, their loans decreased significantly after the global financial crises. Besides,
due to adverse conditions in global markets, external funding capacity of SMEs were deeply
affected from the global crisis. In addition, the share of micro enterprises within SME loans
decreased (Chart 1). Although the NPL ratio of SMEs started to increase after September 2009,
this ratio turned to decelerate in all types of SMEs parallel to the recovery in the economic
activity. However, NPL ratio of micro enterprises is still higher than small and medium sized
enterprises (Chart 2).

61
Box 13.
Treasury Support that will be provided to Credit Guarantee Fund Inc.
In order to help alleviate financial difficulties encountered by the corporate sector firms
whose financial conditions weakened and funding needs increased after the global crisis, a
Council of Ministers Decision was published on July 15, 2009, to provide Treasury support to
Credit Guarantee Fund Inc. (CGF).
Since this fund, which came into effect in January 2010, could not be used efficiently due
to some troubles in implementation, credit coverage was extended as of April 10, 2010 to
include restructured loans and conditions to be met by the beneficiaries were amended in terms
of providing easiness in application.
Table 1. Amounts of Guarantee Provided by CGF (Authorized, Million TL)
Periods 1994-2009 10.09 11.09 12.09 Jan.-Apr. 10

Amount of Guar. Prov. by Equity Capital 1,088.6 65.3 74.5 48.6 157.7
Amount of Guar. Prov. by Treasury Support - - - - 24.7
Source: Credit Guarantee Fund
While the aim was to provide loans at an amount equivalent to TL 10 billion by this facility,
the amount of guarantee actually provided by CGF within the context of Treasury support
became limited to TL 24.7 million. On the other hand, the amount of guarantee provided by
equity capital of CGF reached to TL 157.7 million during the first four months of 2010 (Table
1).
It is aimed to increase the amount of guarantee provided by CGF with Treasury support
and to meet the funding needs of the firms in the coming period with the amendments in
the regulation. The recovery process of SME loans, which increased recently, is expected to
accelerate with more efficient use of the mentioned fund.
Table III.3. Sectoral Breakdown of Corporate Loans (Excluding NPLs) (%)1,2
Loans FX Loans/ Total Loans

2008 2009 03.10 2008 2009 03.10
1 Wholes. and Ret. Trade, Brok., Motor Veh. Maint. and Rep. Serv. 18.1 17.6 17.6 42.9 37.5 33.3
2 Transportation, Storage and Communication 8.2 8.4 8.0 62.1 64.5 68.9
3 Textile and Textile Products Industry 5.2 4.5 4.5 66.6 61.4 60.7
4 Construction 9.5 9.9 10.0 59.1 55.5 54.1
5 Industry of Tobacco, Beverages and Food 5.3 5.2 5.3 50.7 47.9 48.2
6 Manufacture of Basic Metals and Fabricated Metal Products 6.1 5.8 5.9 71.7 69.6 68.9
7 Sources of Electricity, Gas and Water 5.0 6.0 6.3 90.9 93.3 94.6
8 Agriculture, Hunting, Forestry 5.1 5.2 5.1 25.6 18.3 18.8
9 Machinery and Equipment Industry 3.0 2.5 2.4 50.6 50.9 47.2
10 Hotels and Restaurants (Tourism) 3.4 3.9 3.8 79.1 77.9 76.0
Total of 10 Sectors 68.9 69.0 68.9 56.7 54.6 53.8
Source: CBRT
(1) Loans are compiled based on bank reporting under the scope of Central Bank Law No:1211, Article 44. They include corporate loans that are greater than ten thousand Turkish Liras
(inclusive); extended to real and legal bodies by banks (including external loans used by firms with the intermediation of banks). Incurred interests and rediscounts are included, non-cash
loans are excluded.
(2) Financial Intermediation as a sector is excluded.

62
According to Central Bank Risk Center data, the share of ten selected sectors in total
corporate loans as of March 2010 declined by 0.1 percentage point compared to end-2009
to stand at 68.9 percent.
In the same period, the “Wholesale and Retail Trade, Brokerage and Motor Vehicles
Maintenance and Repair Services”, which had the largest share in total corporate loans with 17.6
percent, was followed by “Construction”, and “Transportation, Storage and Communication”
sectors. The decline in the “Textile and Textile Products Industry”, which had been going on for
a while, ceased.
By the end of March 2010, the share of FX-loans in total loans within the selected
sectors mostly tended to decrease with the exception of the “Transportation, Storage and
Communication” and “Electricity, Gas and Water Sources” sectors, which exhibited an increased
use of FX-loans (Table 3).
Table III.4.
Sectoral Breakdown of NPL and Default Ratios of Corporate Loans (%)1,2
2008 2009 03.10

NPL Default NPL Default NPL Default
Ratio Ratio Ratio Ratio Ratio Ratio
1 Sources of Electricity, Gas and Water 0.1 6.1 0.2 9.0 0.2 9.2
2 Industry of Tobacco, Beverages and Food 4.4 9.0 4.9 13.6 4.6 14.0
3 Construction 2.6 8.5 4.1 12.2 3.9 12.5
4 Machinery and Equipment Industry 2.1 5.5 3.1 9.0 2.9 9.2
5 Manuf. of Base Metal and Fabr. Metal Prod. 1.2 5.9 2.5 9.9 2.3 9.9
6 Hotels and Restaurants (Tourism) 2.6 7.8 3.1 10.6 3.0 10.6
7 Agriculture, Hunting, Forestry 4.2 10.3 6.0 11.4 5.8 10.8
8 Transportation, Storage and Communication 1.7 4.6 2.5 7.1 2.8 7.1
9 Textile and Textile Products Industry 10.1 11.6 11.8 16.7 11.4 17.3
10 Wholesale and Ret. Trade, Broker., Mot. Veh. Maint. 3.9 6.5 5.8 11.3 5.5 11.5
Total of 10 Sectors 3.4 7.8 4.5 11.1 4.4 11.0
Total of All Sectors 3.7 8.1 4.9 11.2 4.6 11.3
Source: CBRT
(1) Loans are compiled based on bank reporting under the scope of Central Bank Law No:1211, Article 44. They include corporate loans that are greater than ten thousand Turkish Liras
(inclusive); extended to real and legal bodies by banks (including external loans used by firms with the intermediation of banks.)
(2) Financial Intermediation as a sector is excluded.
Based on the Central Bank Risk Center data, NPL ratios of loans decreased compared
to December 2009 in all sectors analyzed in March 2010, the only exception being the
“Transportation, Storage and Communication” sector, which displayed an increase in NPL
ratios. (Table III.4).
The default rate, which is calculated by dividing the number of firms with NPL to the total
number of firms, rose to 11.3 percent for all sectors in March 2010 (Table III.4).
As of March 2010, default rates in the “Industry of Tobacco, Beverages and Food”, “Textile
and Textile Products Industry”, “Construction” and “Wholesale and Retail Trade, Brokerage and
Motor Vehicles Maintenance and Repair Services” were above the average default rate of the
selected 10 sectors (Table III.4).

63
Box 14.
Export Rediscount Credits Given to Turkish Eximbank and Commercial Banks
In line with the Article 45 of the CBRT Law, with the aim of financing exporters’ export
rediscount credits has been provided by accepting bills concerning exports after dispatch
that have a payment guarantee of a resident commercial bank or Turkish Eximbank and bills
concerning exports before dispatch that have a guarantee of a resident commercial bank with
the mediation of Turkish Eximbank for rediscount.
LIBOR or EURIBOR rates are being applied to these credits that are made available through
acceptance of bills arranged in foreign exchange and have a maximum of 120 days for their
maturity for rediscount. Maximum amount of credit for a single company is 40 million USD for
Foreign Trade Capital Firms and 20 million USD for other companies.
In order to mitigate the negative effects of the global crisis on the real sector, the overall limit
for these credits that was set as 1 billion USD in 2008 has been raised to 2.5 billion USD in
April 2009 and the requirements for using these credits have been eased.
In 2009, 1,365 Million USD and in the first five months of 2010 376.2 Million USD worth
of export rediscount credits have been provided. Stock balance of the aforementioned credits
as of May 20, 2010 is 338 Million USD.
In this framework, between January 1, 2009 and May 20, 2010, for 705 export transactions
of 179 companies, approximately 22 of which are Foreign Trade Capital Firms, export rediscount
credits have been provided. These credits have mostly been used by Metal Main Industry and
Crude Mining Products, Textile and Textile Products, Electrical and Optical Devices, Machines
and Equipment and Transport Vehicles sectors.

Retail Loans 1,2 NPL Ratios for Retail Loans 1 (%)
(Excluding NPLs, Billion TL, %)
140 60 12
120 50
10
100 40
8
80 30
60 20 6
40 10
4
20 0
2
0 -10
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
0
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
Credit Cards
Consumer Loans
Real Growth in Credit Cards (RHA)
Real Growth in Consumer Loans (RHA) Consumer Loans Credit Cards
Source: BRSA -CBRT

Source: BRSA -CBRT
(1) Expressed in real terms using CPI (1994=100).
(1) NPL Ratio = Gross NPL / Gross Loans
(2) Year-on-year percentage change

64
The real rate of increase in consumer loans had trended down since the second quarter
of 2008; however, it started to recover in the last quarter of 2009 in line with the favorable
developments in consumer confidence and employment indicators, as well as low interest rates
on loans. The slowdown in the real growth rate of credit cards was replaced by a limited
increase in the first quarter of 2010. As of March 2010, retail loans amounted to TL 136.6
billion; consumer loans and credit cards increased by 10 percent and 2.4 percent, respectively,
year-on-year in real terms (Chart III.14).
While NPL ratios for consumer loans and credit cards, which tended to increase with
the global crisis, rose until October 2009, they declined after this period and became 3.7
percent and 9.8 percent, respectively, in March 2010 (Chart III.15). This development is mainly
attributable to the increase in credit utilization owing to the removal of tightness in credit
conditions and to the improvement in household expectations for the future, despite the flat
course of NPL amounts since the last quarter of 2009.
In the meantime, the restructuring of non-performing credit cards within the scope of
Law No: 5464 and on a voluntary basis in the subsequent period is expected to have a positive
effect on NPL ratios (Table I.36).

Consumer Loans 1,2 NPL Ratios for Consumer Loans 1 (%)
(Excluding NPLs, Billion TL, %)
110 70 12
100 60
90 50 10
80 40
70 30
8
60 20
50 10
40 0 6
30 -10
20 -20 4
10 -30
0 -40
2
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
Other Consumer Loans 0

Vehicle
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
Housing
Real Growth in Housing Laons (RHA)
Real Growth in Vehicle Loans (RHA)
Real Growth in Other Consumer Loans (RHA) Housing Vehicle Other Consumer
(1) They were brought to real terms using CPI (1994=100). (1) NPL Ratio = Gross NPL / Gross Loans
(2) Annual percentage change as compared to the same month of the previous year.
In March 2010, housing loans and other consumer loans increased by 12.2 percent
and 11.9 percent, respectively, on year-on-year real terms, while vehicle loans decreased by
21.8 percent in real terms; thus, total consumer loans became TL 99.5 billion. The contraction
in vehicle loans, which had lasted for a long time, has decelerated in real terms since the last
quarter of 2009 (Chart III.16). The horizontal course of NPL ratios in all consumer loans, which
started in the last quarter of 2009, was replaced by a decline (Chart III.17).
The Banks’ Loans Tendency Survey suggests that in the second quarter of 2010 credit
standards will remain unchanged in housing and vehicle loans, while they will be tightened in
other consumer loans.
It is observed that flow interest rates referring to interest rates on newly extended consumer
loans, which increased in the last quarter of 2008 due to the global financial crisis, started to
decline afterwards with the effect of the measures taken (Chart III.18).
9 Refers to the balance in the cash loans item, until credit card spending and cash withdrawals are paid back to the bank by the cardholders.

65
Chart III.18
Consumer Loan Interest Rates (%)1,2
Stock Flow
30 30
25 25
20 20
15 15
10 10
12.05
03.06
06.06
09.06
12.06
03.07
06.07
09.07
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
12.05
03.06
06.06
09.06
12.06
03.07
06.07
09.07
12.07
03.08
06.08
09.08
12.09
03.09
06.09
09.09
12.09
03.10
04.10
Housing Loans Housing Loans
Other Consumer Loans Other Consumer Loans
Vehicle Loans Vehicle Loans
Source: CBRT
(1) Other consumer loans are consumer loans excluding housing and vehicle loans.
(2) Weighted average interest rates.
III.1.2. Credit Risk Scenario Analysis

With the aim of assessing the credit risk that the banking sector might be exposed to, an
analysis was conducted on how CARs and the profitability of banks might be affected from a
potential increase in NPL ratios as of March 201010.
The scenario analysis was conducted under the following assumptions;
i) The total credit amount of banks remained unchanged.
ii) NPLs resulting from shocks have the same composition as the existing NPLs of banks.
For banks that did not have any NPLs before the shocks, the NPLs that came into existence due to
the shock implemented are classified as “loans and other receivables with limited collectibility”,
setting aside a 20 percent provision.
iii) Post-shock NPLs were categorized as 100 percent risk–weighted loans in the calculation
of the pre-shock CAR.
iv) There is no change in the total risk-weighted assets and equity capital of the sector
except for the shocks. Collateral amounts were not taken into account while calculating
additional provisions.
Chart III.19.
Effect of Credit Shock on the Profitability of the Sector 1,2
(NPL Increase - Percentage Point) (%)

6 22
19.7 19.1
5 20
17.9 17.1
4 18
17.6
3 16.7 16
15.5 15.6
2 14
1 12
0 10
12.07 12.08 12.09 03.10
Incremental increase in NPL that can be met by profits Current CAR (Right Hand Axis) Post-Shock CAR (Right Hand Axis)
Source: BRSA-CBRT
(1) Excluding the SDIF Bank, Iller Bank and banks that do not have loans in their portfolio.
(2) Post-shock CAR is calculated based on the maximum increase in NPL, which might be covered by the annualized profit.
10
After loans are classified as NPLs and additional provisions are set aside, the post-shock capital adequacy ratio is calculated as follows: (Equity capital – Additional
Provisions) / (Risk Weighted Assets – Additional Provisions)*100.

66
An analysis of how much additional NPLs can be covered by the net profit of the banking
sector reveals that an increase of 3.5 percentage points in NPLs can be covered by that period’s
net profit at end-2008, whereas in March 2010, this figure rebounded to 4.8 percentage points
as a result of the increase in net profit as well as the decrease in NPLs (Chart III.19).
The scenario analysis assesses the effects of a 1-15 point incremental increase in the NPL
ratio on the CAR of the banking sector. Accordingly, as of March 2010, the NPL ratio of banks
that were included in the analysis was 5 percent. While the shock from a maximum 15-point
increase in the NPL ratio of the banking sector reduced the CAR of the sector by 7.6 percentage
points in September 2008 when the global crisis started to affect Turkey, it reduced the CAR by
approximately 7.7 points in March 2010 and the post-shock CARs materialized as 9.1 percent
and 11.3 percent, respectively (Chart III.20).
Chart III.20.
Effects of Credit Shocks on the CAR of the Sector (%)1
CAR (%)
20
19
18
17
March 2010
16
15
14 September 2008 December 2009
13
12
11
10
9
8
Current 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Incremental Increase in the NPL Ratio
Source: BRSA-CBRT
(1) Excluding the SDIF Bank, Iller Bank and banks that do not have loans in their portfolio.
Should the normalization process, currently being witnessed in global financial markets,
persist along with the ongoing economic recovery in Turkey, the acceleration in the banking
sector’s credit volume is expected to continue in the forthcoming period as well. The scenario
analyses reveal the soundness of the capital structure of banks and the improvements in the
asset quality and profitability support credit growth. Nevertheless, the upcoming course of the
credit volume and NPLs will be shaped around the latest developments in international markets
and their implications on the Turkish economy.
III.2. Market Risk and Scenario Analyses
In this section, where the implications of the developments in interest rate and FX risk on
bank balance sheets are assessed, the impact of two scenarios based on hypothetical data are
also analyzed.
III.2.1. Market Risk
The volatility in the Turkish financial system tapered off compared to the previous periods,
on account of the measures taken by the Central Bank of Turkey coupled with improvements
in global risk perceptions. However, recently, with growing concerns particularly over debt
ratios along with budget deficits at international level, Turkish financial markets have also been
influenced and volatility has increased, albeit modestly. The value of the Turkish Lira versus the

67
foreign exchange basket comprising US dollar and Euro is hovering above pre-crisis levels. The
upward trend in the ISE, which started in March 2009, continued, though with a slight decline
recently. The interest rates on GDDSs maintained their downward trend, however they started to
rise at the end of April due to the recent volatility and became 9.5 percent on average by May
2010 (Chart III.21).
Chart III.21.
Foreign Exchange Rates, Interest Rates and Equity Prices1
Trend, TL Index, % Volatility, %

2.1 60 4.5
2.0 54 4.0
1.9 48 3.5
1.8 42 3.0
1.7 36 2.5
1.6 30 2.0
1.5 24 1.5
1.4 18 1.0
1.3 12
0.5
1.2 6
0.0
01.08
02.08
03.08
04.08
05.08
06.08
07.08
08.08
09.08
10.08
11.08
12.08
01.09
02.09
03.09
04.09
05.09
06.09
07.09
08.09
09.09
10.09
11.09
12.09
01.10
02.10
03.10
04.10
05.10
01.08
02.08
03.08
04.08
05.08
06.08
07.08
08.08
09.08
10.08
11.08
12.08
01.09
02.09
03.09
04.09
05.09
06.09
07.09
08.09
09.09
10.09
11.09
12.09
01.10
02.10
03.10
04.10
05.10
FX Basket (%) (2)
Eurobond (%, R.-hand Axis) (3) FX Basket Eurobond
GDDS (%, R.-hand Axis) (4) GDDS ISE-100
ISE-100 (R.-hand Axis) (5)
Source: CBRT
(1) For volatility calculations, standard deviation of daily logarithmic yield of the related market instrument (60 business -days moving average) is used.
(2) 50 percent of the Foreign Exchange Basket is in USD and the rest is in Euro.
(3) Based on USD denominated Eurobond interest rate with 2030 maturity.
(4) Based on the interest rate on the benchmark GDDS.
(5) Calculated by dividing ISE-100 by 1,000.
Central Bank policy rates have remained unchanged and the overnight borrowing rate has
been kept flat at 6.5 percent since November 2009. Moreover, the Monetary Policy Committee
has stated that it may be necessary to maintain policy rates at current levels for some time,
due to uncertainties regarding the global economy. In the meantime, interest rates on deposits
and loans continued to decrease and while interest rates on deposits declined to 9 percent on
average, those on loans dropped to 16 percent in the first quarter of 2010 (Chart III.22).

Interest Rates (%) Ex-ante1 and Ex-post2 Real Interest Rates3 (%)
24
18
22
16
20
14
18
12
16 10
14 8
12 6
4
10
2
8
0
6
03.06
06.06
09.06
12.06
03.07
06.07
09.07
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
04.10
03.06
06.06
09.06
12.06
03.07
06.07
09.07
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
Deposits (1) CBRT (2) Credits (3) Ex-post Interest Rate Ex-ante Interest Rate
Source: CBRT Source: Calculated by using the data of CBRT, ISE and TURKSTAT
(1 ) Banking sector 3-month weighted “stock TL deposit” interest rate. (1) Ex-ante interest rate=(((1+ nominal interest rate)/(1+expected inflation rate))-1)*100
(2) CBRT overnight (O/N) borrowing rate. (2) Ex-post interest rate=(((1+ last year’s nominal interest rate)/(1+realized inflation rate))-
(3) Banking sector weighted “stock TL credit” interest rate. 1)*100. As expected inflation rate, yearly ex-ante CPI figures in the bi-weekly Survey of
Expectations published by the CBRT are used.
(3) GDDS interest rates are the monthly average interest rates on the benchmark GDDS.

68
The real interest rate, which had materialized on the back of the surge in inflation rates
since the end of 2009, and the downward trend of nominal interest rates that started at end-
2008, had taken a sharp plunge since the end of 2008 and became 2.4 percent as of April
2009. Meanwhile, the expected real interest rate materialized as 1.7 percent in April, due to
mounting inflation expectations at end-2009 and in early 2010 (Chart III.23).
In terms of days to re-pricing, negative interest-rate sensitive TL and FX gaps of the
banking sector were mainly observed in the 0-1 month maturity bracket similar to previous
periods, and in March 2010 the gap in this maturity bracket widened compared to the previous
year-end (Chart III.24).
Chart III.24. Interest-Rate Sensitive Gap of the Banking Sector (Billion TL) 1,2
(TL Denominated) (FX Denominated)
140 60
120 50
100 40
80 30
60 20
40
10
20
0
0
-10
-20
-40 -20
-60 -30
-80 -40
-100 -50
-120 -60
-140 -70
-160 -80
0-1 Month
0-1 Month
1-3 Months
3-6 Months
6-12 Months
12+ Months
1-3 Months
3-6 Months
6-12 Months
12+ Months
Total
Total
08 09 03.10 08 09 03.10
Source: CBRT-BRSA
(1) Time to re-pricing is used.
(2) Excluding SDIF bank
The net overall FX position of the banking sector is almost balanced (Chart III.25).

Foreign Exchange Position of the Banking Swap Transactions in TL/FX1
Sector1(Billion USD) (Billion USD)
18 30
12
27
6
24
0
-6
21
-12
18
-18
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
15
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
On Balance Sheet Position

Off Balance Sheet Position
Net Position
Source: BRSA Source: BRSA-CBRT
(1) Participation banks are included. (1) Participation banks are included.
The banking sector’s tendency to invest its foreign currency funds in Turkish lira loans
through derivatives, especially through swap operations, and thus carrying an on-balance sheet
short position and an off-balance sheet long position, was interrupted during the crisis but later

69
resumed on the back of the positive atmosphere in global financial markets since April 2009.
Accordingly, the on-balance sheet short and off-balance sheet long position of the banking
sector resumed its upward trend (Chart III.25, Chart III.26).
The banking sector, which balances its on-balance sheet short position with its off-balance
sheet long position, held USD 36.3 billion of selected TL/FX derivative assets by March 2010.
For USD 31.1 billion of this amount, the counterparty is a financial institution.
III.2.2. Scenario Analyses
III.2.2.1. Interest Rate and Exchange Rate Increases

In this section, the individual and collective effects of the interest rate and exchange rate
increases on the banking sector have been analyzed under two scenarios assuming that the two
increases occur independently.
Under Scenario A, it is assumed that the Turkish lira depreciates by 30 percent against
other currencies, interest rates for the Turkish currency and foreign currencies increase by 6 and
5 percentage points, respectively, and Eurobond prices decline by 15 percent.
Under Scenario B, it is assumed that the Turkish lira depreciates by 40 percent against
other currencies, interest rate increases are twice the increases given in Scenario A and Eurobond
prices decrease by 25 percent.
FXNGP data was used to calculate the effects of exchange rate increase on the sector.
Table III.5. Interest Rate and FX Rate Increase Scenarios
SCENARIO A SCENARIO B
30 percent depreciation of TL against other 40 percent depreciation of TL against other

A. Depreciation of TL
currencies currencies
B. Interest Rate Re-pricing of TL interest sensitive assets Re-pricing of TL interest sensitive assets and
and liabilities falling in 0-1 and 1-3 month liabilities falling in 0-1, 1-3, 3-6 month
Increase-TL maturity brackets at 6 points higher maturity brackets at 12 points higher
C. Interest Rate Re-pricing of TL interest sensitive assets Re-pricing of TL interest sensitive assets and
and liabilities falling in 0-1 and 1-3 month liabilities falling in 0-1, 1-3, 3-6 month
Increase-FX maturity brackets at 5 points higher maturity brackets at 10 points higher
D. Trading Portfolio- 6 points increase in market interest rates of 12 points increase in market interest rates
1 YTL denominated fixed income securities in of TL denominated fixed income securities
TL the trading portfolio in the trading portfolio
Decrease in prices of Eurobonds in the Decrease in prices of Eurobonds in the

E. Eurobond Portfolio
trading portfolio by 15 percent trading portfolio by 25 percent
(1) Trading portfolio consists of “financial assets at fair value through profit or loss” and “securities available for sale”.
To calculate the impact of interest rate increases on the sector, the repricing gap method,
which complements the standard method and is recommended by the Basel Committee on
Banking Supervision, was applied. In this framework, the difference between interest-rate
sensitive assets and interest-rate sensitive liabilities in the “days to repricing maturity brackets of
0-1, 1-3, and 3-6 months ”were taken into account.

70
In scenario analyses based on repricing, it was assumed that:
- The interest rate sensitivity of banks’ assets and liabilities remains unchanged throughout
the analysis period,
- Demand deposits are not interest-rate sensitive,
- There are no new fund inflows or outflows,
- Interest rate increases would last for 3 months in Scenario A and for 6 months in
Scenario B.
The loss of value in Turkish lira-denominated discount securities within the trading portfolio
and the Eurobond portfolio, stemming from the rise in interest rates, has also been calculated.
III.2.2.1.1. Depreciation of TL
Table III.6. Results of Market Risk Scenarios1 (Million TL)
Scenario A Scenario B
09.08 09 03.10 09.08 09 03.10
A, TL Depreciation
a, Total -325.5 123.4 -226.8 -434.0 164.5 -302.5
Profit (Loss) / Own Funds (%) -0.4 0.1 -0.2 -0.6 0.2 -0.3
b, Banks Gaining Profits 155.7 277.2 179.1 207.5 369.6 238.8
c, Banks Suffering Losses -481.1 -153.8 -405.9 -641.5 -205.0 -541.2
Losses of Banks Suffering Loss/ Own Funds -1.2 -0.4 -0.6 -1.6 -0.5 -0.8
B, Interest Rate Increase

a, TL -1,393.8 -941.4 -1,543.1 -1,531.3 -1,401.4 -1,453.7
b. FX -466.2 -526.6 -575.5 -1,344.1 -1,098.5 -1,309.7
Profit (Loss) due to Interest Rate Increase -1,860.0 -1,467.9 -2,118.6 -2,875.4 -2,499.9 -2,763.4
(a+b)
Profit (Loss) due to Interest Rate Increase/ -2.4 -1.5 -2.0 -3.8 -2.5 -2.6
Own Funds (%)
C, TL Trading Portfolio
Loss in Value due to Interest Rate Increase -2,089.9 -3,221.1 -4,021.8 -3,914.6 -6,046.9 -7,515.5
Loss in Value due to Interest Rate Increase/ -2.7 -3.2 -3.8 -5.1 -6.1 -7.2
Own Funds (%)
D, Eurobond Portfolio
Loss in Value -2,627.6 -2,371.2 -2,655.0 -4,379.3 -3,952.0 -4,425.0
Loss in Value/ Own Funds (%) -3.5 -2.4 -2.5 -6.3 -4.0 -4.2
E, Total
Profit (Loss) -6,902.9 -6,936.9 -9,022.2 -11,603.2 -12,334.2 -15,006.3
Profit (Loss)/ Own Funds (%) -9.1 -7.0 -8.6 -15.2 -12.4 -14.4
Current CAR of the Sector (%) 16.0 19.2 18.7 16.0 19.2 18.7
After-Shock CAR of the Sector2 (%) 14.6 17.9 17.1 13.6 16.8 16.0
Source: CBRT
(1) Excluding SDIF bank. T. Kalkınma Bank. Iller Bank and Eximbank.
(2) After-shock profit/loss amounts under the scenarios are assumed to affect only own funds but not the risk weighted assets.

71
Under Scenarios A and B, the banking sector makes a loss amounting to TL 226.8 million
and TL 302.5 million, respectively, owing to its FX long position as of March 2010. As a result
of the shocks, the ratio of losses of banks – arising from their open positions –to their own funds
increased by a small margin compared to end-2009 and became 0.6 percent and 0.8 percent,
respectively under the two scenarios (Table III.6).
III.2.2.1.2. Interest Rate Increases and Loss in Value
i) Under Scenarios A and B, the TL denominated interest income declines as of March

2010. In both scenarios, the amount of decline in TL denominated interest income increases.
The amount of decline in interest income under Scenario A is higher compared to Scenario B,
which assumes that the shock will last for 6 months, owing to the rise in long position for the
3-6 month maturity bracket.
As for foreign currency, while the decline in interest income does not display a major
change under Scenario A, it increases slightly under Scenario B, which covers a fierce interest
rate shock that is twice as large as the one applied in Scenario A.
The overall amount of decline in interest income increases under both Scenarios. While
this increase is driven by the Turkish currency in Scenario A, it is driven, albeit to a limited
extent, by foreign currency in Scenario B. Under Scenario A, the ratio of loss – due to interest
rate increases – to own funds, which was 1.5 percent at end-2009, rose to 2 percent in March
2010, whereas it did not display a significant change in Scenario B.
ii) There has been a rise in the banking sector’s trading portfolio owing to the increase in
the banks’ demand for GDDSs as banks deem GDDSs to be risk-free investment instruments in
the post-crisis period and their classification of these securities in their trading portfolios in line
with the policy rate cut cycle. Therefore, the loss in value due to the shocks in both scenarios
increased compared to end-2009 owing to the rise in trading portfolios. The ratio of loss of
value due to interest rate increases to own funds under Scenario A and Scenario B, which were
3.2 percent and 6.1 percent at end-2009, rose to 3.8 percent and 7.2 percent in March 2010,
respectively.
iii) The loss of value in the Eurobond portfolio increased slightly compared to end-2009
in both scenarios.
In conclusion, as of March 2010, the losses resulting from both Scenario A and Scenario
B increased compared to end-2009. Although the CAR of the sector declined by 1.6 percentage
points under Scenario A and by 2.7 percentage points under Scenario B, it still stands above the
legal ratio of 8 percent and the target ratio of 12 percent.

72
Chart III.27.
Impacts of the Scenarios on the Largest 10 Banks of the Sector1
September 2009 March 2010
Min. Max. Average Min. Max. Average
25 25
20 20
15 15
10 10
%8 %8
5 5
Current CAR CAR After CAR After Current CAR CAR After CAR After
(09.09) Scenario A Scenario B (03.10) Scenario A Scenario B
(1) Largest 10 Banks considering their share in total assets are included in the analysis.
When the impacts of Scenario A and Scenario B on the CARs of the 10 banks with the
highest share in assets are analyzed, it is observed that post-shock CARs decreased by a small
margin, parallel to the current decline in CAR. Under both scenarios, the minimum CAR level
remained well above the legal ratio of 8 percent by March 2010 (Chart III.27).
III.3. Liquidity Risk
Turkey, with both a sound banking system and a flexible and effective liquidity management
framework, which was formed in the light of the experience gained from former crises, was
fairly well prepared for the global turmoil. In times when the global crisis began to deepen, the
gradual and effective implemetation of the measures taken for both Turkish lira and foreign
exchange markets reduced the tensions and volatilities in the markets considerably.
Basic Liquidity Indicators (%)1,2 Liquid Assets (Billion TL)
45 300
270
40
240
35 210
30 180
150
25
120
20 90
15 60
30
10
0
12.06
03.07
06.07
09.07
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
5
12.06
03.07
06.07
09.07
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
Cash Due from CBRT Due from Interbank

Cash and cash Eguivalent Assets/Total Assets
Cash and Cash Equiv.Assets+Free Secr./Total Assets Due from Banks Free Securities

(1) Cash and Cash Equivalent Assets=Cash + Due from CBRT + Due from
Interbank+Due from Banks.
(2) Free Securities= Securities that are not used as collateral or for repo transactions.
When the basic liquidity indicators of the banking sector are analyzed, it is observed that
the ratio of cash and cash-equivalent assets to total assets generally maintained a horizontal

73
course. When the free securities, those securities which are not used as collateral or for repo
transactions, are taken into account, this ratio displayed a tendency to increase as of end-2008
(Chart III.28).
Being the largest item in liquid assets, the recent increase in free securities is noteworthy.
This can mainly be attributed to the tendency of particularly private banks to invest in government
bonds (Chart III.29).
Chart III.30.
Free Securities and Liabilities1 (Billion TL, %)
200 50
180 45
160 40
140 35
120 30
100 25
80 20
60 15
40 10
20 5
0 0
12.06 03.07 06.07 09.07 12.07 03.08 06.08 09.08 12.08 03.09 06.09 09.09 12.09 01.10 02.10 03.10
Free Securities Free Securities/Liabilities(Right-hand Axis) Free Securities/Deposits(Right-hand Axis)
Source: BRSA-CBRT
(1) Participation banks are not included in this calculation
The ratio of free securities, which can be accepted as collateral by the Central Bank to
provide liquidity to banks in the event of a temporary liquidity shortage, to liabilities and to
deposits, maintained an accelerating trend from end-2008 to January 2010. In March 2010,
the aforementioned ratios slightly declined to 28 percent and 37 percent, respectively (Chart
III.30).

Deposits Not Incurring Interest Charge Deposits Not Incurring Interest Charge(March
(Billion TL) 2010)1,2 (%)
120 100
50
100
0
80 -50
-100
60
-150
40 -200
-250
20 Deposit Public Private Foreign Participitaion
Banks Total Deposit Deposit Deposit Banks
Banks Banks Banks
0
07 08 03.09 06.09 09.09 12.09 03.10
Weighted Average Maximum and Minimum
(1) Deposit Ratio that does not incur interest charge = (Deposits-Credits)/Deposits
2) The bank at SDIF is not included.
As the most important source of the Turkish banking system, deposits restrain the
susceptibility of banks to the volatility of interbank funds. The amount of the sector’s deposit that

74
was not used as loans was TL 114 billion as of December 2009, whereas it fell to TL 110 billion
as of March 2010 (Chart III.31). An analysis per bank groups indicates that foreign banks are
slightly more susceptible to external funds compared to other groups (Chart III.32).
Chart III.33.
Foreign Exchange Interbank Operations (Million USD)
2,750
2,500
2,250
2,000
1,750
1,500
1,250
1,000
750
500
250
0
27.10.08
28/11/08
31/12/08
30/01/09
27/02/09
31/03/09
30/04/09
29/05/09
30/06/09
31/07/09
31/08/09
30/09/09
30/10/09
26/11/09
31/12/09
29/01/10
26/02/10
31/03/10
30/04/10
Domestic Banks CBRT Deposit
Source: BRSA-CBRT
The Central Bank of Turkey resumed its activities as an intermediary in the foreign
exchange deposit market on October 9, 2008 with the aim of enhancing the flow of foreign
exchange liquidity. Yet, with the decline of the transaction volume in this market as of the second
half of 2009, banks started to increase interbank transactions again (Chart III.33).

FX Liquidity Adequacy Ratio (%) Total Liquidity Adequacy Ratio (%)
300 300
250 250
200 200
150 150
100 100
Legal Ratio (80 %) Legal Ratio (100 %)

50 50
06.07
09.07
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
04.10
06.07
09.07
12.07
03.08
06.08
09.08
12.08
03.09
06.09
09.09
12.09
03.10
04.10
1 st maturity bracket-FX 2 nd maturity bracket-FX 1 st maturity bracket-Total

2 nd maturity bracket-Total
The liquidity adequacy ratios of the banking sector, calculated pursuant to the “Regulation
Relating to the Measurement and Assessment of Liquidity Adequacy of Banks”, for both total
and foreign currency in the 1st and 2nd maturity brackets11 are above the legal limits and the
recent decline in the 1st maturity bracket is considered to be related with swap transactions
(Chart III.34 and Chart III.35).
11 Assets and liabilities with 0 to 7 days to maturity are included in the 1st maturity bracket and those with 0 and 31 days to maturity are
included in the 2nd maturity bracket.

75
Box15.
Amendment to the Regulations Relating to the Liquidity Management
According to The Communiqué on Reserve Requirements 2005/1, which is regulated by

the CBRT, the liabilities of banks subject to required reserves are calculated every two weeks
on Fridays and reguired reserves that are calculated from these liabilities are maintained over
fourteen days.
With the amendment to the above-mentioned Communiqué, starting from 8 January 2010,
provided that it does not exceed 10 percent of Turkish Lira required reserve amount in a
maintenance period, it is allowed to carry over excess or deficiency Turkish currency liabilities
to be used or made up only in the following period.
On the other hand, with the amendment to the Regulation Relating to the Measurement and
Assessment of Liquidity Adequacy of Banks, overnight placement was added on the asset items
that are calculated daily over stock values regardless of maturity and starting from the period of
11-24.12.2009, stock liquidity adequacy ratio has been started to be calculated for a period
of 14 days, instead of a week, covering the maintenance period of required reserves.
With these amendments, it is intended to provide flexibility to liquidity management by

banks.
The stock liquidity ratio, which is calculated by using the full stock values of selected
assets and liabilities as per the liquidity regulation, and which stands at a minimum of 7 percent,
displayed an increase of around 1 percentage point when it started to be calculated at fortnightly
intervals from the period of 11-24 December 2009 onwards in line with the period of required
reserve provision and with the effect of the inclusion of overnight placements in liquid assets
starting from the same date (Chart III.36).
Chart III.36.
Liquidity Ratio Calculated By Using Stock Values of Selected Assets and Liabilities (%)
12
11
10
7
Legal Ratio (7 %)
6
Legal Ratio (6 %)
5
Legal Ratio (5 %)
4
04.08
05.08
06.08
07.08
08.08
09.08
10.08
11.08
12.08
01.09
02.09
03.09
04.09
05.09
06.09
07.09
08.09
09.09
10.09
11.09
12.09
01.10
02.10
03.10
04.10
Source: BRSA-CBRT
As the effects of the global turmoil began to subside, the Central Bank of the Republic
of Turkey started to release and implement exit strategies in order to prepare markets for the
normalization process.

76
As the exit strategy announced by the Central Bank on 14 April 2010 suggests, the
facilities provided for the Turkish lira and FX liquidity are planned to be brought to pre-crisis
levels orderly and gradually. Within this scope;
· The FX required reserves ratio may gradually be increased at a measured pace.
· After the effects of the developed countries’ exit strategies are monitored, the intermediary
function of the Central Bank in the foreign exchange deposit market will be abolished.
· The maturity of the foreign exchange deposits, which the banks will be able to borrow
from the Central Bank within the predetermined borrowing limits, will be decreased from 3
months to 1 week and considering the developments in global interest rates, foreign exchange
deposit lending rates announced by the Central Bank may be increased.
· Excessive funding of the Turkish lira market will be reduced gradually, and
· The technical interest rate adjustment process will become operative.
The FX required reserves ratio, which had been reduced by 2.0 percentage points to
become 9 percent at the end of 2008, was increased by 0.5-percentage point to reach 9.5
percent. With this increase in the FX required reserve ratio, approximately USD 700 million of
foreign currency liquidity was drawn from the market on 14 May 2010.
The Monetary Policy Committee stated on 18 May 2010 that market liquidity conditions
necessary to implement the first step of the technical rate adjustment had emerged. Observing
that current rates for one-week repo auctions fluctuated around 7 percent, the Committee
decided to start conducting one-week repo auctions via quantity auction with a fixed interest
rate. In this respect, the one-week repo rate was set at 7 percent. The Central Bank envisages
continuing to gradually implement the exit strategy.
Chart III.37.
1
Market Liquidity Index
1.0 1.0
0.9 0.9
0.8 0.8
0.7 0.7
0.6 0.6
0.5 0.5
0.4 0.4
0.3 0.3
03/06
06/06
09/06
12/06
03/07
06/07
09/07
12/07
03/08
06/08
09/08
12/08
03/09
06/09
09/09
12/09
03/10
MLE Benchmark Value
Source: ISE, CBRT

(1) Calculation methodology of MLI is explained in the ninth issue of the Financial Stability Report and the increase in the MLI in this illustration denotes an increase in liquidity. The Chart
presents the 5-day-moving average of the MLI.
The adverse effects of global turbulence on the Turkish financial markets were compensated
in a short time thanks to the liquidity measures taken by the Central Bank and the market

77
liquidity index displayed a rapid rise on the heels of the peak of global crisis, when its five-day
average fell below the reference value of 0.5. However, the vulnerability in financial markets
is predicted to persist for an extended period due to financial problems and thus, increased
riskiness particularly in Eurozone (Chart III.37).
Box 16. Market Liquidity and Volatility
As is known, the way the financial system functions highly depends on the functioning of the
markets. Sudden drops in market liquidity may adversely affect the real economy in the long
run, thus policy makers may be forced to intervene in the markets in order to provide market
liquidity. In this framework, taking the importance of market liquidity into account, the stress in
financial markets is evaluated in conjunction with market liquidity.
The determining factors of market liquidity differ during stressed and normal market
conditions. Under stressed conditions, risk management applications, funding liquidity
restrictions and concerns regarding counterparty risk become important1. When market
liquidity decreases due to widening spreads, asset prices can be affected to a great extent. On
the other hand, excessive price movements may cause the transactions to decrease and this
may bring decline in market liquidity. Therefore, market illiquidity and price volatility may have
a feedback loop and the markets may not serve their main role of distributing resources and
risk effectively. Hence, the lasting high stress in markets may constitute a serious burden for the
economy thereby causing financial instability and harm to the real economy.
Chart 1.
The Relationship Between Liquidty and Volatility
Government Bonds Market Foreign Exchange Market
1 1
0.9 Stress Periods 0.9
0.8 0.8
0.7 0.7
0.6 0.6
Liquidity
liquidity
0.5 0.5 Stess Periods

0.4 0.4
0.3 0.3
0.2 0.2
0.1 0.1
0 0
0 1 2 3 4 5 6 0 1 2 3 4 5 6
Volatility Volatility
Source: CBRT, ISE
In this context, considering the fact that market liquidity decreases and volatility increases
during periods of uncertainty, government bond markets and foreign exchange market, which
are components of the Market Liquidity Index (MLI), are analyzed. To analyze these two parallel
moving indicators, especially during crisis periods, relative spreads showing the liquidity and
the standard deviation of prices as a proxy for volatility are used. Relative spread is computed
by dividing the difference between the best bid and the best ask prices with the average of these

78
prices. After an appropriate transformation, the increase in the liquidity indicator implies an
increase in the market liquidity.
As seen from the scatter plots, although under normal market conditions the relationship
between the volatility and the market liquidity is not that clear, overall, the extreme values
corresponding to periods of stress strengthen the said relationship. The reason for this may be
the parallel moving factors affecting both the liquidity and the volatility and their dominance
compared to other factors especially during stressed periods. All these may increase the
nonlinear tendency of this relationship. On top of this, when the market liquidity is high, under
the assumption of no new coming information to the market, an asset is expected to be traded
at a price which is very close to its last trading price, which is called price continuity. However,
despite the presence of market liquidity, due to new information, prices may jump. Under such
situations, volatility may arise not from the market illiquidity but from the new information flow.
In other words, high volatility does not necessaily mean low liquidity2,3. On the other hand,
the widening spreads may have low impact on the prices and the increase in the volatility may
remain limited.
(1) Market Distress and Vanishing Liquidity: Anatomy and Policy Options, Claudio Borio (2004), BIS.
(2) Liquidity Risk and Banks’ Bidding Behavior: Evidence from the Global Financial Crisis, Gersl & Komarkova (2009) , Czech Journal of Economics and
Finance.
(3) Trends in the Liquidity of Hungarian Financial Markets – What does the MNB’s New Liquidity Index Show?, Páles & Varga ( 2008), MNB.
Box 17. Global Liquidity Standard
Prior to the crisis, many banks treated available liquidity as a free good due to its abundance,
invested in complex structured products and relied heavily on wholesale funding. As both asset
and funding markets had been liquid for an extended period, banks did not consider stress
scenarios that involved key asset and funding markets drying up and they did not consider the
interaction of credit, market and liquidity risks and a sustained period of liquidity stress. As a
result, the banking sector faced the financial crisis with inadequate liquidity cushions to absorb
the stress and ultimately massive injections of liquidity by central banks were required.
In response to liquidity risk management shortcomings and other lessons learned from
the financial crisis, the Basel Committee started implementing a programme aimed at
strengthening the international framework for liquidity risk regulation, supervision and risk
management. Within the scope of this programme, the Committee is working on developing
a global standard for liquidity regulation of cross-border banks. The aim of the standard is to
strengthen the consistency and robustness of liquidity risk supervision globally.
The Consultative Document on “International Framework for Liquidity Risk Measurement,
Standards and Monitoring” was posted on BIS website in December 2009. According to the
Document, banks have to maintain an adequate level of unencumbered, high quality assets
that can be converted into cash to meet liquidity needs over a 30-day period under an acute
liquidity stress scenario specified by supervisors. According to the “Liquidity coverage ratio”
the ratio of liquid assets to net cumulative cash outflows within a 30 day period should be no
lower than 100%. The numerator of the ratio is the total market value of those assets defined

79
as liquid assets. Net cash outflows, on the other hand, are defined as cumulative expected
cash outflows minus cumulative expected cash inflows arising in the specified stress scenario
in the time period under consideration. Cumulative expected cash outflows are calculated
by multiplying outstanding balances of various categories or types of liabilities by assumed
percentages that are expected to roll-off, and by multiplying specified draw-down amounts to
various off-balance sheet commitments. Cumulative expected cash inflows are calculated by
multiplying amounts receivable by a percentage that reflects expected inflow under the stres
scenario.
In addition to the liquidity coverage ratio, banks are required to meet “net stable funding
ratio” which is intended to complement liquidity coverage ratio, address structural liquidity
mismatches and maintain core funding above a certain level. According to the net stable
funding ratio, the ratio of available amount of stable funding to the required amount of stable
funding should be greater than 100%. Available stable funding is defined as the total amount
of an institution’s capital, preferred stock with maturity of equal to or greater than one year,
liabilities with effective maturities of one year or greater and that portion of stable non-maturity
deposits and/or term deposits with maturities of less than one year that would be expected to
stay with the institution for an extended period in an idiosyncratic stress event. The required
amount of stable funding, on the other hand, is calculated as the sum of the value of the assets
held by the institution multiplied by a specific required stable funding (RSF) factor assigned to
each particular asset type. The RSF factor applied to the reported values of each asset is the
amount of that item that supervisors believe should be supported with stable funding. Assets
that are more liquid and more readily available to act as a source of extended liquidity in a
stressed environment receive lower RSF factors (and require less stable funding) than assets
considered less liquid in such circumstances and, therefore, require more stable funding. For
instance, government debt securities receive a 5% RSF factor, whereas fixed assets receive
100% RSF factor. The amount of required stable funding includes amount of required stable
funding arising from off-balance sheet activities as well.
The Consultation period ended on April 16, 2010 and at the moment the Committee is
revising the comments received. In addition to the Consultative Document, “Quantitative Impact
Study” was initiated in order to assess the impact of the global liquidity standard on banks.
Moreover, another subgroup within the Committee is working to identify the macroeconomic
effects of the liquidity standard and effects on sectors, which are not subject to the global
liquidity standard. Global liquidity standard will be recalibrated taking into consideration the
analysis results of the macroeconomic effects group, the results of the QIS and comments
received during consultation. The aim is to finalize the Global Liquidity Standard by end-2010
and implement it by 2012.
III.4. Financial Strength Index
The Financial Strength Index (FSI) is computed with the aim of forming an “aggregate
indicator” relating to the direction of the financial strength of the banking sector. Six sub-indices
(asset quality, liquidity, exchange rate risk, interest rate risk, profitability, and capital adequacy)
were used to form this index. Ratios projecting the risks and fragilities of the banking sector were
selected under each sub-index and these ratios, reflected in certain weights, constitute the index
(Table III.7).

80
Table III.7 Financial Strength Index Variables

Financial Strength Indicators Direction of the Impact Weight
Gross Non-Performing Loans / Gross Loans negative 0.33
Asset Quality Net NPL / Shareholders’ Equity negative 0.33
1
Fixed Assets / Total Assets negative 0.33
2
Liquidity Liquid Assets / Total Assets positive 1.00
3
On-Balance Sheet FX Position / Own Funds negative 0.50
Exchange Rate Risk 3,4
FX Net General Position / Own Funds negative 0.50
(Int. Sens. TL Assets with a Mat. Up to 1 Month – Int. Sens.
5 negative 0.50
TL Liab. With a Mat. Up to 1 Month) / Own Funds
Interest Rate Risk
(Int. Sens. FX Assets with a Mat. Up to 1 Month – Int. Sens.
5 negative 0.50
FX Liab. With a Mat. Up to 1 Month) / Own Funds
Net Profit / Total Assets positive 0.50
Profitability
Net Profit / Shareholders’ Equity positive 0.50
6
Free Capital / Total Assets positive 0.50
Capital Adequacy
Capital Adequacy Ratio positive 0.50
(1) Fixed Assets consist of subsidiaries, assets to be sold, fixed assets and net non-performing loans.
(2) Liquid Assets consist of cash, due from the CBRT, due from money market, due from banks and receivables from reverse repo transactions.
(3) Own funds are the regulatory capital, and it is different from the equity in the balance sheet. The calculation is in absolute values.
(4) Foreign exchange net open position is the sum of on and off balance sheet foreign currency positions. The calculation is in absolute values.
(5) The calculation is in absolute terms.
(6) Free capital is calculated by deducting fixed assets from equity.
The assessment of the sub-indices forming the FSI is as follows (Chart III.38);
i. Asset Quality Index: The Asset Quality Index, which was 122 at the end of 2008,
denoted a downward trend in 2009 and became 119.9 at the end of the year. The said index
entered an upward trend in the first quarter of 2010 and climbed to 120.6 in March. This
increase was mainly driven by the decline in the NPL ratio.
ii. Liquidity Index: The liquidity index, which was 81.6 at the end of 2009, was down to
76.7 in March 2010. The fall in the index was mainly attributable to the fact that the ratio of
liquid assets to total assets constituting the index decreased from 11.7 percent to 10.3 percent
in the last quarter.
iii. Exchange Rate Risk Index: The Exchange Rate Risk Index, which had declined since
March 2009 due to the rise in the on-balance sheet open positions, became 128.7 at the end
of 2009. In March 2010, however, the index rose to 129.1 due to the limited decline in the
on-balance sheet open position.
iv. Interest Rate Risk Index: Interest Rate Risk Index, which stood at 126.8 in December
2008, showed some improvement and became 128.1 owing to the decline in the ratio of the
difference between TL-denominated interest sensitive assets and liabilities with a maturity of up
to 1 month to own funds. The index remained unchanged in March 2010.
v. Profitability Index: The Profitability Index, which exhibited an upward trend in 2009
owing to the rise in the net interest margin parallel to easing interest rates, became 108.2 at
the end of the year. In the first quarter of 2010, it continued to increase due to the decline in
provision expenses, and became 109.3.
vi. Capital Adequacy Index: The index, which had been on an upward trend since October
2008, continued to increase throughout 2009 owing to the rise in the capital adequacy ratio
and the ratio of free capital to total assets and became 152.7 at end-2009. The index remained
almost unchanged in March 2010.

81
Chart III.38.
Financial Strength Index Variables1 (1999=100)
Index Index
125 90
120
85
115
80
110
105 75
100
70
95
90 65
12.02
12.03
12.04
12.05
12.06
12.07
12.08
12.09
03.10
12.02
12.03
12.04
12.05
12.06
12.07
12.08
12.09
03.10
Asset Quality Average Liquidity Average
Index Index
132 145
131
140
130
129 135
128
130
127
126 125
125
124 120
123
115
12.02
12.03
12.04
12.05
12.06
12.07
12.08
12.09
03.10
12.02
12.03
12.04
12.05
12.06
12.07
12.08
12.09
03.10
Exchange Rate Risk Average
Interest Rate Risk Average
Index Index
114 165
112 160
155
110
150
108
145
106
140
104 135
102 130
12.02
12.03
12.04
12.05
12.06
12.07
12.08
12.09
03.10
12.02
12.03
12.04
12.05
12.06
12.07
12.08
12.09
03.10
Profitability Average Capital Adequacy Average
Source: BRSA-CBRT
(1) The averages used are the averages of related sub-indices between December 1999 – March 2010.
The Financial Strength Index, monitored as an indicator of the soundness of the banking
sector, which was 119.2 at the end of 2008, became 119.9 at the end of 2009, owing to the
rises in the capital adequacy index, profitability index and interest rate risk index. In March
2010, the index fell by a small margin and was down to 119.4 due to the decline in the liquidity
index (Chart III.39).

82
Chart III.39.
Financial Strength Index1 (1999=100)
Index
121
118
115
112
12.02
12.03
12.04
12.05
12.06
12.07
12.08
12.09
03.10
Financial Strength Index Average
Source: BRSA-CBRT
(1) The average used is the average of financial strength index between December 1999 – March 2010.

83

84
IV. FINANCIAL INFRASTRUCTURE

As confirmed by the recent developments in global markets, an efficient and secure
financial structure, which complies with international standards, and which is composed of
large-value and retail payment systems, securities settlement systems, central counterparties,
and security custodians, contributes significantly to the sustainability of financial stability.
The Committee on Payment and Settlement Systems (CPSS) under the Bank for International
Settlements (BIS), taking into consideration the contribution of financial market infrastructures
to financial stability, carry out studies for the development of systemically-important systems
constituting the financial infrastructure, to make them resilient against shocks and to ensure their
access to central bank resources. Within this framework, central banks are expected to take a
more effective role in developing, regulating and monitoring financial market infrastructures in
the upcoming period.
This section presents the recent developments in the Turkish Interbank Clearing-Real
Time Gross Settlement System (TIC-RTGS), through which real-time settlement of Turkish Lira
transactions are realized; the Turkish Interbank Clearing-Electronic Securities Transfer and
Settlement System (TIC-ESTS), which facilitates the dematerialized and real-time transfer and
settlement of securities in electronic form; the cheque clearing system that enables clearing of
cheques on accounts among banks and the card based payment system.
IV.1. Turkish Interbank Clearing Real Time Gross Settlement System (TIC-RTGS)
and Electronic Securities Transfer and Settlement System (TIC-ESTS)
The CBRT is the sole owner and operator of the TIC-RTGS, which is a systemically important
electronic payment system realizing payments among banks in Turkish Lira and TIC-ESTS, which
works in an integrated manner with the TIC-RTGS and provides the opportunity for participants to
realize their transfer and settlement of securities with regard to the Delivery versus Payment (DvP)
principle.
TIC-RTGS and TIC-ESTS have forty-eight participants which are all banks operating in Turkey
according to the Banking Act.
The transaction value of the TIC-RTGS rose by 8.1 percent in 2009 compared to the
previous year and reached TL 23,704 billion. The number of TIC-RGTS transactions performed
in 2009 increased by 8.5 percent compared to the previous year, reaching a total of 129 million
(Chart IV.1).

85
Despite the decline in the number of DvP transactions in 2009, the value of transactions
increased significantly. In the reporting period, the number of DvP transactions through TIC-ESTS
decreased by 18.7 percent to become 25.3 thousand and the value of transactions increased by
67.6 percent to reach TL 1,710 billion (Chart IV.2).
Chart IV.1. Chart IV.2.

Annual Volume and Value of Transactions Annual Volume and Value of DvP¹ Transactions
within TIC-RTGS (Billion TL, Volume-Million) within TIC-ESTS (Billion TL, Volume-Million)
25000 140 1800 35000
22500 1600
120 30000
20000
1400
17500 100 25000
1200
15000 80
1000 20000
12500
10000 60 800 15000
7500 600
40 10000
5000 400
20 5000
2500 200
0 0 0 0
2005 2006 2007 2008 2009 05 06 07 08 09
Value Volume (right-hand axis) Value Volume (right-hand axis)
(1) DvP: Delivery versus Payment
Predictability of the distribution of payments within the day contributes to the efficiency of
liquidity management and decreases the liquidity risk. The concentration of payments continues to
display intensity between 08:00-10:00 in the morning and 14:00-17:30 in the afternoon (Table
IV.I).
Table IV.1. Concentration of Payments within TIC-RTGS by Hours (%)
08:00-10:00 10:00-12:00 12:00-14:00 14:00-16:00 16:00-17:30

I-2008 28 3 2 24 43
II-2008 26 4 3 25 42
III-2008 28 4 4 28 36
IV-2008 30 5 5 32 28
I-2009 32 4 4 35 25
II-2009 32 5 7 33 23
III-2009 35 4 5 36 20
IV-2009 34 6 7 34 19
I-2010 32 5 5 35 23
Source: CBRT
Since there are no upper and lower limits for the value of transactions in the TIC-RTGS,
which is the sole interbank clearing-real time gross settlement system in Turkey, the number of
annual TIC-RTGS transactions is higher than that of many European countries. As of 2009, the
ratio of transactions in small amounts (below TL 3,000) to the total number of transactions via TIC-
RTGS was 78 percent.

86
Although the ratio of the value of TIC-RTGS transactions to the GDP is lower than the same
ratio in the European countries, it exhibits an increasing pattern as a result of the development of
financial markets and the increasing number of such transactions over the years. The value of TIC-
RTGS transactions, which was 21.4 times the GDP in 2007, reached 22.7 times the GDP in 2008
and continued to rise in 2009, reaching 24.7 times (Table IV.2).
Table IV.2.
Real Time Gross Settlement Systems (RTGS) Country Comparison
2004 2005 2006 2007 2008

Belgium (ELLIPS)
Transaction Volume (Million) 1.8 1.8 1.7 2.0 2.8
Transaction Value (Billion USD) 18,233 21,448 24,373 36,453 39,683
Transaction Value/GDP 50.6 57.2 61.1 79.5 78.7
France (TARGET 2-BDF))
Holland (TOP)
Germany (RTGS-Plus)
Switzerland (SIC)
TARGET
CLS
Turkey (EFT)
Transaction Volume (Million) 58,7 76,4 93,1 106,1 119,3
Transaction Value/GDP 10,2 12,1 20,0 21,4 22,7
Source: BIS, CBRT
In 2009, the share of top five banks in terms of the number of transactions through TIC-
RTGS, increased year-on-year from 60.3 percent to 60.6 percent, whereas that of the top ten
banks declined year-on-year from 80.6 percent to 80.1 percent (Chart IV.3).

87

Concentration of Transactions in TIC-RTGS (%)1 Availability Ratios of TIC-RTGS -ESTS (%)
100 100
90
79.2 78.6 80.5 80.6 80.1
80
99.5
70
60.3 60.6
57.3 56.9 58.6
60
99
50
40
98.5
30
20
98
10
I II III IV I II III IV I II III IV
0
2005 2006 2007 2008 2009 07 08 09
TIC-RTGS-5 Banks TIC-RTGS-10 Banks

(1) CBRT transactions are excluded.
The TIC-RTGS system continues to demonstrate high availability. The availability ratio,
which indicates the continuity of the payment system and which is the ratio of the time span that
participants can access the system to total working hours, was 99.85 percent on average in 2009
(Chart IV.4).
Box 18.
Committee on Payment and Settlement Systems (CPSS)
Committee on Payment and Settlement Systems (CPSS) together with Basel Committee on
Banking Supervision, the Committee on the Global Financial System, the Markets Committee
and the Irving Fisher Committee on Central Statistics is one of the committees that has its own
secretariat within Bank for International Settlements (BIS) and an important level of autonomy to
decide about its agenda and activities. CPSS commences its studies at the request of governors
of the Global Economy Meeting or at its own discretion and reports directly to the governors.
CPSS serves as a forum for central banks to follow up developments in domestic and cross-
border payment and settlement systems. CPSS also prepares Redbooks in close cooperation
with countries providing wide assessments of their payment systems in order to strengthen
the payment systems infrastructure all over the world. Redbooks for Turkey are published in
years 2000 and 2007. Additionally, CPSS published reports on large-value payment systems,
securities settlement systems, settlement mechanisms for foreign exchange transactions, the
clearing of derivative products, retail payment instruments, and electronic money. Moreover,
CPSS has set up standards such as Core Principles for Systemically Important Systems, CPSS/
IOSCO Recommendations for Securities Settlement Systems and Central Counterparties.
Committee was first established by G-10 countries as Experts Group on Payment Systems
in 1980. G 10 countries set up an ad hoc Committee on Interbank Netting Schemes and
then they established the Committee on Payment and Settlement Systems, as a follow-up to the

88
work of the Committee on Interbank Netting Schemes. The CPSS continued its work as one of
the permanent committees reporting to the G10 Governors of the central banks. The CPSS,
previously consisting of the National Bank of Belgium, Bank of Canada, European Central
Bank, Bank of France, Deutsche Bundesbank, Hong Kong Monetary Authority, Bank of Italy,
Bank of Japan, Netherlands Bank, Monetary Authority of Singapore, Sveriges Riksbank, Swiss
National Bank, Bank of England, Federal Reserve Bank of USA, has recently added Reserve
Bank of Australia, Central Bank of Brazil, the People’s Bank of China, Reserve Bank of India,
Bank of Mexico, Central Bank of the Russian Federation, Saudi Arabian Monetary Agency,
South African Reserve, Bank of Korea as new members by invitation.
The Central Bank of the Republic of Turkey (CBRT) has become a member of CPSS in
November 2009. The departments of the CBRT has been playing important role in the CPSS/
IOSCO review of the standards for Financial Market Infrastructures through participating in
CPSS sub groups of Margin and Collateral, Liquidity Risk, Transparency and Data Access,
Operational Risk and Governance.
(1) Belguim, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, England, USA
IV.2. Cheque Clearing System
Cheque clearing operations, which play an important role in payment systems, are carried
out by the Interbank Clearing Houses Center (ICH) under the oversight of the CBRT.
As of year-end 2009, out of 40 banks that participated in interbank cheque clearing

operations, 6 were engaged only in cheque clearing with physical presentation, whereas the
remaining 34 were also engaged in cheque clearing without physical presentation.
Chart IV.5.
Volume and Value of Cheques Transacted in ICH (Billion TL, Volume-Million)
250 30
25
200
20
150
15
100
10
50
5
0 0
05 06 07 08 09
Value Volume (right-hand axis)
Source: CBRT

89
The number of cheques, which were subject to the cheque clearing process in ICH,
decreased by 16.6 percent compared to 2008, amounting to 19.3 million in 2009. In the
given period, the value of cheques processed decreased by 14.3 percent and became TL 200.8
billion (Chart IV.5).
Among the cheques presented to the ICH, the ratio of those below TL 5,000 hovered at
around 60 percent, whereas the ratio of the cheques that remained below TL 10,000 reached
around 80 percent over the years. These ratios indicate that the cheque, which is mostly used by
Small and Medium-Sized Enterprises (SME) and by tradesmen, who occupy an important place
in Turkish trade, served largely as a means for payment of small amounts (Chart IV.6).
Chart IV.6.
Share of Cheques Processed in the Card Clearing System, amounting less than TL 5.000 and TL
10.000 within Total Cheques (%)
100
80
60
40
20
0
2007 2008 2009
TL 5,000 and less TL 10,000 and less
Source: CBRT
In the cheque clearing system, the debit and credit positions of participants are determined
by multilateral netting following the finalization of the provision operations.
Table IV.3. Cheque Clearing System-Netting Ratio
2005 2006 2007 2008 2009

Netting Ratio (%) 71.96 74.79 77.82 79.31 80.40
Transaction Volume (Billion TL) 156.2 188.3 220.5 234.3 200.8
Liquidity Saving Ratio (Billion TL) 112.4 140.8 171.6 185.8 161.4
Source: CBRT
Since the cheque clearing system operates according to the multilateral netting method,
the liquidity requirement of participants arising from their cheque transactions is decreasing. The
netting ratio of transactions realized through the cheque clearing system increased compared to
the previous year and reached 80.40 percent in 2009 (Table IV.3).

90
Chart IV.7.
Settlement Hours of Cheque Clearing System– 2009
14:24
13:12
12:00
10:48
9:36
01.09 02.09 03.09 04.09 05.09 06.09 07.09 08.09 09.09 10.09 11.09 12.09
Realized Settlement Hour Expected Settlement Hour

Source: CBRT
In the cheque clearing system, in order to finalize settlement, all banks that become
debtors as a result of netting have to fulfill their obligations no later than 12:00 on the following
business day. In 2008, settlement in the cheque clearing system was delayed two times, for
a total of 220 minutes, as participants performed their obligations later than the due time.
On the other hand, in 2009, delays in the cheque clearing system occurred once, and the
total duration of delays amounted to 54 minutes (Chart IV.7). While the average settlement
time in the cheque clearing system was 11:18 a.m. in 2008, it was 10:41 a.m. in 2009; and
favorable developments were observed in the system regarding both the number of delays and
the average time of settlement.
Box 19.
Check Act of 2009, No: 5941
“The Law on the Protection of Check Bearers and the Governance of Check Payments” of
1985, criticized for years, has been repealed by the Check Act of 2009 which was published
in the Official Gazette of 12/20/2009 No: 27438. Main objectives of the new Check Act are
to ensure the reliability of checks as a payment instrument, to protect check bearers, to get
underground economy under supervisory control, and to align the penalty provisions about
bad checks with the Turkish Criminal Code No: 5237. Moreover, some new regulations related
to printing and drawing of checks took place in the new Act.
The new Act requires banks to be prudent and careful; and to investigate their customers
to whom they will open check accounts and give check books. These provisions ensure banks
to select their customers carefully and to promote public confidence in checks as a payment
instrument.
In terms of the fight against underground economy, the new Law includes provisions like
opening separate accounts for bearer check accounts and sending information about those

91
account holders to the Presidency of Revenue Administration to get bearer checks under
control.
Regarding the check types, the new Act brings the obligation of printing the checks for
merchants and non-merchants and bearer checks in a way that allows to distinguish them from
each other in terms of their styles. According to the new Act, checks can be issued by Banks
and printing principals of check books are determined by the Central Bank of the Republic of
Turkey. The Communique No: 2010/2 of the Central Bank of the Republic of Turkey which
includes provisions regarding the printing principals of check books was published in the
Official Gazette of 01/20/2010 No: 27468.
The amount that the drawee bank should legally pay to the bearer (holder) of the bad
checks is determined as TL 600 in the Law. This amount will be redetermined by the Central
Bank of the Republic of Turkey every year. A very crucial change related to this issue is that
banks will not be able to transact this amount as bounced anymore.
According to the new Law, there will be a legal fine instead of a penalty of imprisonment
about the persons who caused the check to be transacted as bounced. There are also a
number of penalties for the bank officials who disobey the provisions of the Law.
In addition, the new Law requires the banks to give the new check books to their customers
and to annihilate the old check books they own until 7/1/2010. On the other hand, the
provisions in the Law No: 3167 will continue to be implemented for the old check books given
to the customers by banks.
IV.3. Developments in the System of Card Payments
Pursuant to the Law on Bank Cards and Credit Cards No. 5464 that took effect in
2006, the institutions which perform clearing and settlement transactions regarding card based
systems are subject to the permission of the Banking Regulation and Supervision Agency. As
required by the Law, the clearing and settlement activities for the payables and receivables
arising from the use of cards will be carried out between the card issuing organizations within
the framework of written agreements to be signed by and between them or through companies
to be promoted and founded by at least five card-issuing organizations. The principles and
procedures of the activities of, and the conditions of membership in, and the supervision and
audit of these companies will be dealt with in a regulation to be issued by the Board in due
consultation with the Turkish Central Bank.
The Interbank Card Center (ICC) was established in 1990 as a legal entity with the
partnership of 13 banks in order to ensure clearing and settlement of debit and credit cards. It
currently has 28 members.
ICC-member banks’ clearing and settlement transactions are carried out by the ICC.
Debts arising from netting in the ICC are settled at the CBRT.

92

Number of Debit Cards and Credit Cards Number of ATM-POS (Thousand)
(Million)
70
25 2,000
1,800
20 1,600
60
1,400
15 1,200
50
1,000
10 800
40 600
5 400
30 200
0 0
20 05 06 07 08 09
05 06 07 08 09 Automatic Teller Machine (ATM)
Number of Credit Cards Number of Debit Cards Point of Sale (POS) (right-hand axis)
Source: ICC Source: ICC
Developments in debit and credit cards, which are two leading non-cash payment
instruments, reveal that the usage of these cards continues to spread. The number of credit
cards, which was 43.4 million in 2008, increased by 2.3 percent to become 44.4 million in
2009. The rate of increase in credit cards decreased significantly year-on-year in 2009. In
the meantime, the number of debit cards continued to rise and became 64.7 million with an
increase of 6.8 percent (Chart IV.8).
Due to widespread use of debit and credit cards in Turkey, the numbers of point of sale
(POS) devices and automated teller machines (ATM) have increased. In 2009 the number of
POS devices rose by 6.5 percent reaching 1.7 million and the number of ATMs increased by 8.3
percent reaching 23.8 thousand. Furthermore, Turkey started the interoperable ATM practice on
October 1, 2009, with the participation of 26 banks and became the first country implementing
the project in Europe. With this system, debit cardholders are able to withdraw money from and
perform balance inquiries at all ATMs (Chart IV.9).

Volume and Value of Credit Card Transactions Volume and Value of Debit Card Transactions
(Billion TL, Million) (Billion TL, Million)
250 2,000 200 700

1,800
600
200 1,600 160
1,400 500
150 1,200 120 400

1,000
80 300
100 800
600 200
40
50 400 100
200
0 0
0 0
05 06 07 08 09
05 06 07 08 09
Vol. of Purchase Trans. (right-hand axis) Vol. of Purchase Transactions (r-hand axis)
Vol. of Cash Withdrawal Transactions (right-hand axis) Vol. of Cash Withdrawal Trans. (r-hand axis)
Value Value

(1) Domestic and external use of credit cards issued in Turkey (1) Domestic and external use of bank cards issued in Turkey

93
In 2009, the volume of credit card transactions rose by 8.8 percent while the value of
credit card transactions increased by as much as 9.6 percent compared to 2008 and they
reached 1.8 billion and TL 202.8 billion, respectively. The share of purchasing transactions
within total credit card transactions in 2009 was 95.1 percent in volume and 90.4 percent in
value (Chart IV.10).
Analysis of debit card transactions reveals that the volume of debit card transactions rose
by 17.0 percent reaching 804 million, whereas the value of debit card transactions went up by
20.8 percent reaching TL 185.1 billion. Use of debit cards for cash withdrawal became 80.9
percent in volume and 97.3 percent in value. Yet, the use of debit cards for purchases remained
at 19.1 percent in volume and 2.7 percent in value. Meanwhile, over the last five years, the use
of debit cards for cash withdrawal has increased by 34.8 percent in volume; whereas this ratio
for purchases has risen by a significant margin of 355.8 percent (Chart IV.11).

Volume and Value of Credit Cards processed in Volume and Value of Debit Cards processed in
the Card Clearing System (Billion TL, Million) the Card Clearing System (Billion TL, Million)
8 160
100 900
90 800 7 140
80 700 6 120
70
600 5 100
60
500
50 4 80
400
40 3 60
300
30
2 40
20 200
10 100 1 20
0 0 0 0
04 05 06 07 08 09 05 06 07 08 09
In 2008, the volume of transactions, which were subject to the credit card clearing
process, rose by 10.9 percent compared to the previous year; however, this rate of increase
decreased to 5.0 percent and the volume of transactions became 780.6 million in 2009.
Meanwhile, the rate of increase in the value of transactions, which was 26.1 percent in 2008
compared to the previous year, slowed down to become 13.7 percent and the total value of
transactions stood at TL 86.6 billion in 2009(Chart IV.12).
According to ICC data, the volume of transactions which were subject to the clearing
process of debit cards rose by 41.4 percent compared to the previous year and reached 143.5
million, while the value of transactions increased by 32.1 percent reaching TL 7.4 billion in
2009. The significant increase in the volume and value of transactions in 2009 was mainly
driven by the common use of ATMs, effective as of October 1, 2009, which allowed cardholders
to withdraw money from any ATM of any bank (Chart IV.13).

94
Table IV.4. Card Clearing and Settlement System – Netting Ratio (%)
2005 2006 2007 2008 2009

Clearing and Settl. of Credit Cards
Netting Ratio (%) 77.7 81.7 78.3 76.5 78.1
Transaction Volume (Billion TL) 41 48 60 76 87
Liquidity Saving (Billion TL) 32 39 47 58 68
Clearing and Settl. of Credit Cards
Netting Ratio (%) 58.3 60.8 64.0 61.9 65.1
Transaction Volume (Billion TL) 3.0 3.9 4.5 5.6 7.4
Liquidity Saving (Billion TL) 1.7 2.4 2.9 3.6 4.8
Source: ICC
As is the case with the cheque clearing system, the card clearing system also operates
according to the multilateral netting method and therefore reduces the liquidity requirements of
participants arising from card transactions. The netting ratio of credit card transactions realized
through the system was 78.1 percent and the liquidity requirement relating to credit card
transactions decreased by TL 68 billion in 2009. This same ratio was 65.1 percent for debit
card transactions and TL 4.8 billion of liquidity savings was obtained (Table IV.4).
Chart IV.14.
Ratio of Value of Credit Card Transactions Subject to Clearing Process to Total Value of Credit
Card Transactions (%)
50
47.6
48
46
43.8
44
42.7 42.7
42 41.2
40
38
36
05 06 07 08 09
Source: ICC
The ratio of the value of credit card transactions subject to clearing to total transactions
for credit cards was 47.6 percent in 2005, whereas it fell to 41.2 percent in 2008. This
decline was mainly attributable to the tendency to use credit cards via POS and ATM devices
of issuer banks as a result of the increase in the number of POS and ATM devices over the
years and the promotions introduced. In 2009, as the rate of increase in the value of credit
card transactions subject to clearing was higher than the rate of increase in the total value of
credit card transactions compared to the previous period, the ratio of the value of credit card
transactions subject to clearing to total transactions for credit cards displayed a slight increase
in 2009 (Chart IV.14).

95
Box 20.
Financial Market Infrastructures (FMI)
Financial Market Infrastructures (FMIs), such as large value payment systems, securities
settlement systems and central counterparties, have a crucial role in conducting the clearing
and settlement of critical transactions in the financial system Participants of these FMIs include
banks, intermediatory institutions and other financial institutions.
The recent global turmoil in the financial markets increased the importance of financial
stability. In this sense, safe and efficient payment and settlement systems became one of the
important factors of the financial stability. As seen from the last crisis, providing accurate and
on time settlement to their participants, FMIs have become an important resilience factor for
the financial markets. On the other hand, FMIs are one of the main channels transmitting
financial shocks both in domestic and international markets. Under normal conditions,
reaching to FMIs from cross border countries increases the efficiency of the market, however
it can cause important problems during crisis situations. The tendency of developing domestic
FMIs towards international participations in recent years increased the risks transmitted through
these channels.
Especially this situation has shown the need for the review of the risks and the development
of the risk management mechanisms of FMIs. In this context, the following CPSS core principles
come to the forefront;
• The system should have clearly defined procedures for the management of liquidity
risks, which specify the respective responsibilities of the system operator and the participants
and which provide appropriate incentives to manage and contain those risks,
• The system should provide prompt final settlement on the day of value, preferably
during the day and at a minumum at the end of the day,
• A system in which multilateral netting takes place should, at a minimum, be capable

of ensuring the timely completion of daily settlements in the event of an inability to settle by the
participant with the largest single settlement obligation,
• Assets used for settlement should preferably be a claim on the central bank; where
other assets are used, they should carry little or no settlement risk.
Central bank’s services to FMIs is another important issue discussed recently. Having
an account at the central bank, using payment systems, facilitating collateral management
services, intraday liquidity and overnight credit take place among these services. The ability
to access central bank sources creates an important advantage for FMIs, especially in the
sense of liquidity risk management. This facility helps to increase the financial strength and the
resilience of these critically important institutions, and ensures financial system to function more
robust and resilient against the crisis. Particularly, the elimination of counterparty risk is seen

96
as an important gain since it prevents the crises to spread among the financial markets and
institutions, and it contributes to the financial stability target of central banks.
Having taken the systemic importance of FMIs into account, CPSS started studies in order to
support the strength of these institutions. In the context of CPSS’s studies, the resilience of FMIs,
their liquidity standards, and accession to the central bank services take place. Accordingly,
preventive measures to increase the strength of the FMIs in performing their payment obligations
in the case of the financial and operational problems in one or more participants of the FMI,
in FMI itself or the whole financial system are discussed.
Another important issue regarding the assessment of the FMIs is to develop the
recommendations for these institutions including the risks appeared during the last period and
to supervise and oversee the alignment of the risk management of these institutions with respect
to the risk management related standards. In this sense, CPSS and International Organization
of Securities Commissions (IOSCO) have started to reassess their recommendations regarding
FMIs with central banks and other regulatory authorities.

97

98
LIST OF CHARTS
Chart I.1 Equity and Commodity Prices 1

Chart I.2 CDS Indices in USA and Europe and US Volatility Index 2
Chart I.3 Growth Rates in Selected Countries 2
Chart I.4 Unemployment and NPL Ratios 3
Chart I.5 Inflation Rates 3
Chart I.6 Policy Rates in Selected Countries 4
Chart I.7 Government Bond Rates and CDS Ratios for PIIGS Countries 6
Chart I.8 Credit Survey Results of US and European Banking Sectors 8
Exchange Rates and Risk Premia in Selected Developing Coun-
Chart I.9 8
tries
Chart I.10 Ratio of Current Account Balance to GDP 12
Chart I.11 Export - Import Volumes and the Trade Deficit 12
Chart I.12 Imports and Exports Quantity Indices 12
Chart I.13 Imports and Exports Unit Value Indices 12
Chart I.14 Development of the Balance of Payments Items 13
Chart I.15 Short-Term External Debt and International Reserves 14
Chart I.16 Import Coverage Ratio of Reserves 14
Chart I.17 Net Assets of International Banks in Selected Countries 15
Roll-over Ratios for Long-term Loans of Banks and Non-Bank
Chart I.18 15
Sector
Chart I.19 Growth Rate and Composition 16
Chart I.20 Contributions of Sectors to Growth 16
Chart I.21 Industrial Production and Capacity Utilization Rate 17
Chart I.22 Industrial Production, Capacity Utilization Rate and Growth 17
Chart I.23 Corporate Sector Confidence Index 17
Number of Newly Established and Liquidated Companies and
Chart I.24 18
Cooperatives

99
The Ratio of Over-Drawn Cheques Presented to the ICH to the

Chart I.25 18
total Cheques Presented to the ICH
Chart I.26 Month PPI and CPI Developments 18
Chart I.27 End-Year CPI Expectations 18
Chart I.28 Composition of Total Public Sector Net Debt Stock 22
General Government Nominal Debt Stock Defined by EU
Chart I.29 22
Standards
Chart I.30 Composition of Domestic Debt Stock 23
Chart I.31 Maturity Structure of Government Domestic Debt Stock 23
Chart I.32 Government Domestic Debt Securities by Holders 23
Chart I.33 Household Liabilities to GDP 24
Chart I.34 Retail Loans to Household Consumption Expenditures 24
Chart I.35 Decomposition of Household Liabilities 28
Credit Card Balances of Deposit Banks and Balances that Incur
Chart I.36 28
Interest Charge
Chart I.37 FX-Indexed Consumer Credits and FX Indexed Housing Credits 29
Chart I.38 Unemployment Rate and NPL Ratios 29
Ratio of Household TL Investment Instruments to FX Investment
Chart I.39 31
Instruments
Chart I.40 Household Financial Assets and Liabilities 31
Currency Composition of Loans Received by the Corporate
Chart I.41 33
Sector
Currency Composition of FX Loans Received by the Corporate
Chart I.42 33
Sector
Remaining Maturity Composition of Long-Term Loans Received
Chart I.43 33
from Abroad by Corporate Sector
Interest Composition of Long Term Loans Received from Abroad
Chart I.44 33
by Corporate Sector
Chart I.45 Ratios Related to FX Position of the Corporate Sector 34
Chart I.46 Sales revenues 35
Chart I.47 Profit by Quarters 35
Chart I.48 Return on Equity and Assets 36
Chart I.49 Asset Turnover Ratio (times) and Net Profit Margin 36
Chart I.50 EBIT Margin 36
Chart I.51 Financial Expenses / EBIT 36
Chart I.52 Leverage Ratio and Short Term Liabilities 37

100
Chart I.53 FX Liabilities and Short Position 37

Chart II.1 Distribution of the Balance Sheet Size of the Financial Sector 39
Chart II.2 Development of the Banking Sector 39
Comparison of the Ratio of the Turkish Banking Sector Balance
Chart II.3 40
Sheet Size to GDP with Selected EU Countries
Chart II.4 Balance Sheet size of the Banking Sector by Groups 40
Chart II.5 Composition of Banking Sector Assets by Structure of Shares 40
Chart II.6 Asset Structure of the Banking Sector 44
Chart II.7 Liabilitiy Structure of the Banking Sector 44
Chart II.8 Return on Equity and Assets 45
Chart II.9 Asset turnover and Net Profit Margin 45
Chart II.10 Sources of Total Income 46
Chart II.11 Ratio of Expenses to Total Income 46
Chart II.12 Asset Shares of Banks Based on Capital Adequacy Ratios 50
Chart II.13 Capital Adequacy and Tier 1 Ratio 51
Chart II.14 Equity and Free Capital 51
Chart II.15 Distribution of Risk-Weighted Items 51
Chart II.16 Risk-Weighted Items and Average Credit Risk Weight 51
Chart III.1 Gross Loans 55
Chart III.2 Real Growth in Gross Loans by Groups 55
Chart III.3 Non-Performing Loans 56
Chart III.4 Non-Performing Loans, Provisions and Collaterals 56
Chart III.5 Currency Composition Loans 58
Chart III.6 FX Loans 58
Chart III.7 Distribution of Loans by Provinces 59
Chart III.8 Loan Interest Rates 59
Chart III.9 Spread Between Corporate Loan and Deposit Rates 59
Chart III.10 Breakdown of Gross Loans and Real Growth Rates 60
Chart III.11 NPL Ratios of Corporate Loans and Retail Loans 60
Chart III.12 Corporate Loans by Type 60
Chart III.13 NPL Ratios of Corporate Loans 60
Chart III.14 Retail Loans 64
Chart III.15 NPL Ratios for Retail Loans 64

101
Chart III.16 Consumer Loans 65

Chart III.17 NPL Ratios for Consumer Loans 65
Chart III.18 Consumer Loan Interest Rates 66
Chart III.19 Effect of Credit Shock on the Profitability of the Sector 66
Chart III.20 Effects of Credit Shocks on the CAR of the Sector 67
Chart III.21 Foreign Exchange Rates, Interest Rates and Equity Prices 68
Chart III.22 Interest Rates 68
Chart III.23 Ex-ante and Ex-post Real Interest Rates 68
Chart III.24 Interest-Rate Sensitive Gap of the Banking Sector 69
Chart III.25 Foreign Exchange Position of the Banking Sector 69
Chart III.26 Swap Transactions in TL/FX 69
Chart III.27 Impacts of the Scenarios on the Largest 10 Banks of the Sector 73
Chart III.28 Basic Liquidity Indicators 73
Chart III.29 Liquid Assets 73
Chart III.30 Free Securities and Liabilities 74
Chart III.31 Deposits Not Incurring Interest Charge 74
Chart III.32 Deposits Not Incurring Interest Charge 74
Chart III.33 Foreign Exchange Interbank Operations 75
Chart III.34 FX Liquidity Adequacy Ratio 75
Chart III.35 Total Liquidity Adequacy Ratio 75
Liquidity Ratio Calculated By Using Stock Values of Selected
Chart III.36 76
Assets and Liabilities
Chart III.37 Market Liquidity Index 77
Chart III.38 Financial Strength Index Variables 82
Chart III.39 Financial Strength Index 83
Chart IV.1 Annual Volume and Value of Transactions within TIC-RTGS 86
Chart IV.2 Annual Volume and Value of DvP¹ Transactions within TIC-ESTS 86
Chart IV.3 Concentration of Transactions in TIC-RTGS 88
Chart IV.4 Availability Ratios of TIC-RTGS –ESTS 88
Chart IV.5 Volume and Value of Cheques Transacted in ICH 89
Share of Cheques Processed in the Card Clearing System,
Chart IV.6 amounting less than TL 5.000 and TL 10.000 within Total 90
Cheques
Chart IV.7 Settlement Hours of Cheque Clearing System– 2009 91

102
Chart IV.8 Number of Debit Cards and Credit Cards 93

Chart IV.9 Number of ATM-POS 93
Chart IV.10 Volume and Value of Credit Card Transactions 93
Chart IV.11 Volume and Value of Debit Card Transactions 93
Volume and Value of Credit Cards processed in the Card
Chart IV.12 94
Clearing System
Volume and Value of Debit Cards processed in the Card Clear-
Chart IV.13 94
ing System
Ratio of Value of Credit Card Transactions Subject to Clearing
Chart IV.14 95
Process to Total Value of Credit Card Transactions

103
LIST OF TABLES
Table I.1 Balance of Payments 11

Table I.2 Developments in Financial Accounts 14
Table I.3 Central Government Budget Realizations 20
Table I.4 Household Disposable Income, Liabilities and Interest Payments 25
Table I.5 Ratio of Household Liabilities to GDP in Selected Countries 27
Table I.6 Number of Credit Card and Consumer Loan Defaulters 29
Table I.7 Restructured Credit Card Receivables as per the Provisional Article No. 30
5 of the Law No. 5464 (Thousand TL, Number of Persons)
Table. I.8 Composition of Household Financial Assets 30
Table. I.9 Financial Debt of the Corporate Sector 32
Table I.10 FX Assets and Liabilities of Corporate Sector 34
Table II.1 Comparison of Selected EU Countries 41
Table III.1 Selected Credit Ratios 56
Table III.2 NPL Ratios in Selected Countries 57
Table III.3 Sectoral Breakdown of Corporate Loans 62
Table III.4 Sectoral Breakdown of NPL and Default Ratios of Corporate Loans 63
Table III.5 Interest Rate and FX Rate Increase Scenarios 70
Table III.6 Results of Market Risk Scenarios 71
Table III.7 Financial Strength Index Variables 81
Table IV.1 Concentration of Payments within TIC-RTGS by Hours 86
Table IV.2 Real Time Gross Settlement Systems (RTGS) Country Comparison 87
Table IV.3 Cheque Clearing System-Netting Ratio 90
Table IV.4 Card Clearing and Settlement System – Netting Ratio 95

104
LIST OF BOXES
Box 1. The Fiscal Problems of the Countries in the Euro Area and 5
the Possible Effects of These Problems on the Banking Sector
Box 2. Measures Taken Against The Latest Developments in Europe 6
Box 3. Systemic Risk and Macro-prudential Policies 9
Box 4. Draft Law on Fiscal Rule 21
Box 5. Income and Living Conditions Survey 25
Box 6. Foreign Exchange Position of Corporate Sector Firms Listed 38

on the ISE
Box 7. Systemically Important Financial Institutions 42
Box 8. Net Interest Margin and Profitability 47
Box 9. Profitability Performance and Country Comparison 48
Box 10. Basel Commitee on Baking Supervision and Regulations on 52

Capital Adequacy
Box 11. Some Amendments to the Regulation on the Procedures and 58
Principles for Determination of Qualifications of Loans and
Other Receivables by Banks and Provisions to be set Aside
Box 12. Types of SME Loans 61
Box 13. Treasury Support that will be provided to Credit Guarantee 62

Fund Inc.
Box 14. Export Rediscount Credits Given to Turkish Eximbank and 64
Commercial Banks
Box 15. Amendment to the Regulations Relating to the Liquidity 76
Management Değişiklikler
Box 16. Market Liquidity and Volatility 78
Box 17. Global Liquidity Standard 79
Box 18. Committee on Payment and Settlement Systems (CPSS) 88
Box 19. Check Act of 2009, No: 5941 91
Box 20. Financial Market Infrastructures (FMI) 96

105
ABBREVIATIONS
ATM : Automated Teller Machine

BCBS : Basel Committee on Banking Supervision
BDF : Banque De France
BIS : Bank for International Settlements
BoE : Bank of England
BRSA : Banking Regulation and Supervision Agency
CAR : Capital Adequacy Ratio
CBRT : Central Bank of the Republic of Turkey
CDS : Credit Default Swap
CGF : Credit Guarantee Fund
CLS : Continuous Linked Settlement
CMB : Capital Markets Board
CPI : Consumer Price Index
CPSS : Committee on Payment and Settlement Systems
CRA : Central Registry Agency
DvP : Delivery versus Payment
EBIT : Earnings Before Interest and Taxes
ECB : European Central Bank
ECOFIN : Economic and Financial Affairs Council
EFT : Electronic Funds Transfer
ELLIPS : Electronic Large-value Interbank Payment System
EMBI : Emerging Markets Bond Index
ESA : European System of Accounts
ESTS : Electronic Securities Transfer System
EU : European Union
Fed : Federal Reserve System
FMI : Financial Market Infrastructure
FSB : Financial Stability Board
FSI : Financial Strength Index
FX : Foreign Exchange
FXIL : Foreign Exchange Indexed Loans
FXNGP : Foreign Exchange Net General Position
G-10 : Group of 10
G-20 : Group of 20
GDDS : Government Domestic Debt Securities
GDP : Gross Domestic Product
GSM : Global System for Mobile Communication

106
ICC : Interbank Card Center

ICH : Interbank Clearing Houses Center
IMF : International Monetary Fund
IOSCO : International Organization of Securities Commissions
ISE : Istanbul Stock Exchange
LTRO : Longer-term Refinancing Operations
MLI : Market Liquidity Index
MRO : Main Refinancing Operations
MSCI : Morgan Stanley Capital International
MTP : Medium-Term Program
NPL : Non Performing Loans
PBS : Primary Budget Surplus
PDP : Public Disclosure Platform
PIIGS : Portugal, Italy, Ireland, Greece and Spain
POS : Point of Sale
PPI : Producer Price Index
RIB : Revenue Indexed Bonds
ROA : Return on Assets
ROE : Return on Equity
RTGS : Real Time Gross Settlement
S&P : Standard and Poor’s
SDIF : Savings Deposit Insurance Fund
SIC : Swiss Interbank Clearing
SIFI : Systemically Important Financial Institutions
SME : Small and Medium Size Enterprise
SPO : T. R. Prime Ministry State Planning Organization
TARGET : Trans-European Automated Real Time Gross Settlement Express
Transfer System
TL : Turkish Lira
TOBB : Union of Chambers and Commodity Exchanges of Turkey
TOKİ : Housing Development Administration of Turkey
TOP : RTGS system operated by the DNB (De Nederlandsche Bank)
Treasury : Republic of Turkey Undersecretariat of Treasury
TSPAKB : The Association of Capital Market Intermediary Institutions of Turkey
TURKSTAT : Turkish Statistical Institute
USA : United States of America
USD : United States Dollar
VAT : Value Added Tax
VIX : Chicago Board of Exchange Volatility Index
WEO : World Economic Outlook

107

108

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III. Banking Sector Risks 55

Financial Stability Report - May 2010

III.2. Market Risk and Scenario Analysis 67

IV. Financial Infrastructure 85

Financial Stability Report - May 2010

Financial Stability Report - May 2010

Financial Stability Report - May 2010

Financial Stability Report - May 2010

Financial Stability Report - May 2010

I.1. External Sector

I.1.1. International Developments

160 160 250 250

100 100 150 150

Developed Countries Emerging Countries General Index Energy Sub-Index

Financial Stability Report - May 2010

Source: Bloomberg (*) Average of March 2009-March 2010 period.

06 07 08 09 10* 11* 06 07 08 09 10* 11*

Source: IMF WEO

Developments in financial markets bolstered by the stimulus packages introduced

1 IMF World Economic Outlook, April 2010.

Financial Stability Report - May 2010

Developed Countries and Regions Developing Countries and Regions

06 07 08 09 10* 11* 06 07 08 09 10* 11*

Source: IMF WEO

Financial Stability Report - May 2010

Source: National Central Banks

Financial Stability Report - May 2010

Financial Stability Report - May 2010

Box 2. Measures Taken Against The Latest Developments in Europe

2 Portugual, Italy, Ireland, Greece and Spain.

Financial Stability Report - May 2010

Source: European Commission, ECB, Fed and Central Banks.

Financial Stability Report - May 2010

Source: Fed, ECB.

Value of National Currencies of Selected EMBI+

S. Africa Turkey EMBI+ Brazil S. Africa

Financial Stability Report - May 2010

Box 3. Systemic Risk and Macro-prudential Policies

As a result, macro-prudential policies aimed at minimizing the formation of systemic risks

Financial Stability Report - May 2010

Although these developments at national level are considered constructive, it is obvious

Financial Stability Report - May 2010

I.1.2. Balance of Payments

Table I.1. Balance of Payments (Billion USD)

2006 2007 2008 2009 03.10*

Financial Stability Report - May 2010

Chart I.10. Chart I.11.

Source: CBRT, TURKSTAT Source: CBRT

Chart I.12. Chart I.13.

Exports Imports Exports Imports

Source: CBRT Source: CBRT

Financial Stability Report - May 2010

Financial Stability Report - May 2010

Chart I.15. Chart I.16.

Source: Undersecreatariat of Treasury, CBRT Source: CBRT

Table I.2. Developments in Financial Accounts (Billion USD)

2006 2007 2008 2009 03.10*

Financial Stability Report - May 2010

Chart I.17. Chart I.18.

Source: BIS Source: CBRT

Δat = y (a(t-1) – a) + k (bt – b)