The seizure of Bank Asya: The elimination of a rotten ‘lemon’ in markets

The Banking Regulation and Supervision Agency (BDDK), an independent watchdog that regulates the banking system in Turkey, has taken over the management of Bank Asya, a bank that is based on the much-discussed Islamic banking system, and appointed a new management board. This is not a seizure about Bank Asya's partnership structure and shareholder rights. The BDDK has only changed the bank's administrative structure in accordance with the relevant laws. The BDDK stipulated that Bank Asya would submit credentials regarding the status of 185 (A) group privileged shareholders who had the authority to designate the bank's management board until Jan. 2, 2015. However, the bank failed to submit the required credentials within the prescribed time and asked for an extension to the deadline. Thereupon, the BDDK extended the deadline until the end of January. The bank, which submitted the credentials of 53 privileged shareholders to the watchdog up until Feb. 2, failed to present those of 132 privileged shareholders out of a total of 185 in due time, creating an ambiguity about those shareholders.

This tells us that Bank Asya did not only violate Turkey's banking rules, but also world-wide banking principles, such as openness and transparency. I think the BDDK's decision to reappoint the management board is a belated but sound conclusion as there was an obvious moral hazard with the bank's management board. Moreover, Bank Asya is at the helm of the Gülen Movement, which uses religious elements for its political purposes both in Turkey and many parts of the world. The National Security Council (MGK), Turkey's top institution in charge of internal and external security, described this movement as a national threat in an official document. Undoubtedly, the existence of a bank that is affiliated with such an infamous movement, in quite a sensitive field like banking, particularly Islamic banking, is a situation that would undermine the entirety of the banking system in Turkey.

Today, Turkey has one of the most outward and most global banking systems in the world. The proportion of foreign share in the Turkish banking system is around 25 percent and more than 50 percent of the public banks' shares in Borsa İstanbul are owned by non-Turkish investors. In this regard, the public authority's seizure of the management of a bank, which has moral hazard risks in many respects and cannot explain its shareholding structure to the top banking watchdog, shows us that the market mechanism in Turkey is regulated very well. If the BDDK had not taken this step, not only the Turkish banking system, but also the whole global banking system, particularly Islamic banking, which has a gradually increasing transaction volume, would be damaged.

Unfortunately, the Gülen Movement distorts this reality and has resorted to an awesome disinformation campaign presenting the seizure as the government intervened in Bank Asya's partnership shares and stock exchange shares in Borsa Istanbul. Based on this disinformation, the movement claims that the government intervened in the whole banking system in Turkey.

In fact, what happened to Bank Asya remains rather insignificant when compared to what was experienced in the U.S. after the 2008 financial crisis. As is known, in September 2008, U.S. Federal Bureau of Investigation (FBI) launched a corruption investigation into four major bankrupt finance companies that led to a deepening of the economic crisis in the country. This probe included two mortgage companies, Fannie Mae and Freddie Mac, a leading insurance company, American International Group (AIG), and an investment bank Lehman Brothers. At the time, the FBI found that the managers and staff of these institutions hid information about housing finance, manipulated information and conducted large-scale commercial corruptions.

At the time, U.S. Justice Department spokesman Brian Roehrkasse said that investigating commercial corruption allegations was within the FBI's realm of investigation, while then FBI director Robert Müeller announced that a total of 24 financial institutions were under investigation.

On those days, AIG made a deal with the U.S. Federal Reserve and it was given an emergency loan support of $85 billion with 11.5 percent interest rate for a two-year period. In return, the U.S. government received 79.9 percent of AIG's shares. The loan borrowed from the Fed was used in the sale and liquidation process of the company's assets. So, for the Turkish financial system, the Bank Asya issue is not as a big and comprehensive a matter as AIG and Lehman Brothers was for the American financial system.

However, it is really important that the issue is presented as if there were a problem in the Turkish banking system. If a similar example was experienced in the U.S., it would be obviously considered a criminal problem and a potential threat against national security, apart from being a moral hazard. Furthermore, managers and shareholders, who had a say in that banks management, would be arrested. I must say that relevant laws in Turkey are rather inadequate when compared to those of the U.S.

In fact, during the process in which American energy company Enron went bankrupt and Lehman Brothers and other market-maker banks began threatening the system in the U.S., the American media and academic circles made very pertinent analyses.

For instance, Professor Paul Krugman described Enron's bankruptcy as the collapse of a system rather than of a single company. The most obvious reason for this is that the most important source of American companies is the stock market. Companies' equity shares in the stock market rise or fall in line with their balance sheets. The fact that Enron misled investors and hid information by falsifying its balance sheets is an open and a contagious systemic problem.

At this point, George Akerlof's theory of "The Market for Lemons: Quality Uncertainty and the Market Mechanism," where he discusses information asymmetry, becomes more of an issue. In short, financial institutions with a contagious moral hazard germ like Bank Asya quickly create their equivalents and the market would become the market of the "bad." In this respect, Bank Asya was not only a criminal and rotten "lemon" for Turkey, but also for the entirety of global market.