Turkey Saving Deposit Insurance Fund Bank Recapitalization (2000-2001)

Throughout the 1990s, Turkey's macroeconomy featured high and fluctuating inflation and oscillating GDP growth rates. After Turkey's April 1999 elections, Turkey adopted a new economic program in coordination with the International Monetary Fund (IMF) with three goals: fiscal adjustment, structural reform, and an exchange rate commitment. By the end of the third quarter of 2000, concerns over the pace of structural reform mounted and short-term interest rates remained high. The new Banking Regulation and Supervision Agency (BRSA) revealed significant corruption within several small banks taken over by the Saving Deposit Insurance Fund (SDIF). In November 2000, Demirbank, a private bank that had developed a balance sheet especially concentrated in government debt assets and increasingly acted as a market maker for those securities, could not meet its overnight obligations; this forced it to sell government debt in the secondary market. These sales put significant pressure on overnight rates and created a negative environment for publicly owned banks. In response, the SDIF took over the bank, after having taken over several others. In December 2000, the SDIF injected TL 3.8 quadrillion ($6.1 billion) of capital into the eight SDIF-controlled banks to recapitalize them at a level of 8% of risk-weighted assets. The capitalization program, depositor guarantee, and the central bank's successful defense of the lira calmed the crisis in November and December.