Confidence in Turkey's banking system may have reached a new low following the fall of the first local bank to be toppled by the country's severe financial crisis.

The very small Ulusal Bank is now under the control of the Banking Supervisory Board. The regulators took the bank over because its debts exceeded its assets and it could no longer meet its obligations.

Since the central bank was forced to announce the devaluation of the Turkish lira, the economy has been in a tailspin: investors have abandoned the currency, interest rates have rocketed as high as 5,000% and the country's equity market lost over a third of its value. Bakers are quoting bread prices in dollars, fuel prices have soared and shopkeepers are refusing credit card payments.

Letters of credit

Letters of credit have not escaped the ill winds of Turkey's financial crisis. The Ankara Chamber of Industry has said that foreign companies were refusing to accept L/Cs issued by Turkish companies. Local banks are reported to be freezing personal and company loans.

To help Turkey out of its dire straits, Prime Minister Bulent Ecevit is angling for $25 billion in foreign loans. Where this money will come from is not yet clear, but much depends on the outcome of current negotiations between Turkish officials and IMF and World Bank representatives on a revised disinflation plan.

Banking sector reforms needed

Turkey will have to address structural flaws in its banking system more seriously. The central bank is rudderless since former-governor Gazi Erçel resigned in February. The top four private banks are generally considered sound, but weeding unhealthy institutions out of the country's remaining 23 banks is needed if the sector is to be considered sound.

Four state-owned banks that account for 40 per cent of deposits have accumulated losses conservatively estimated at US$20 billion. Some analysts are suggesting that corruption, possibly connected to holders of high office in political circles, may be uncovered at these institutions. If this is the case, then political reforms may be a necessary precondition of some structural reforms in the banking sector.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.