Evaluating the Performance of Central Bank of the Republic of Turkey

2010

Table of Contents

Table of Contents............................................................................................................................................21. General Background Information...........................................................................................................3

1.1. Historical Background.....................................................................................................................31.2. TCMB Duty and Authority..............................................................................................................3

1.2.1. The fundamental duties and powers of the Bank......................................................................41.2.2. Fundamental powers of the Bank.............................................................................................41.2.3. Main advisory duties of the Bank.............................................................................................5

2. TCMB Strategic Plan..............................................................................................................................62.1. Vision...............................................................................................................................................62.2. Mission.............................................................................................................................................62.3. Policies.............................................................................................................................................62.4. Strategic Areas and Themes.............................................................................................................6

2.4.1. Public Area Themes..................................................................................................................62.4.2. Global Area Themes.................................................................................................................72.4.3. Corporate Area Themes............................................................................................................7

3. Swot Analysis of Central Bank of the Republic of Turkey....................................................................84. Income Statement Analysis....................................................................................................................95. Balance Sheet Analysis.........................................................................................................................116. Related Ratios.......................................................................................................................................147. PROJECT PAPER INTERVIEW EVALUATION FORM.................................................................158. Conclusion............................................................................................................................................169. References.............................................................................................................................................16

1. General Background Information

1.1. Historical Background

Central Bank of Turkey is the oldest bank in Turkey which was inherited by the Ottoman Bank

which was established at 1856. At first it only functioned as a discounter for government treasury bonds

and borrower for the Ottoman Empire. After1863 it was re-established as a U.K. and French partnership

and gained the title of being the Ottoman Empire`s Central Bank. With this title it started to press money

in behalf of the government. As being the central bank it also started to conduct the treasury`s tasks such

as collecting the government`s receivables, paying the payables calculating interests for empire`s inner

and outer debts. During this period the main capital source of the central bank was hardly criticized by the

public and eventually at 11 March 1917 a new bank named Osmanlı İtibar-ı Millî Bankasi was established

but due to the World War 1 it could not find the chance of being an international bank which will function

as the central bank of Ottoman Empire.

After the World War 1 a tendency towards establishing an independent monetary policy emerged

and with the political independency which was acquired with Independence War, the government

accelerated its operations and eventually at 3 October 1931 Turkiye Cumhuriyet Merkez Bankasi has

started its operations as an independent company from the Government of Turkey Republic.

Its main building is currently located at Istiklal Street, Istanbul-Turkey and is currently employing 4401

workers around Turkey. It has branches at 21 provinces of Turkey and has offices around the world and

has shares which are publicly traded.

In 11 June 1930, according to law of 1715, Central Bank of the Republic of Turkey has founded

with 15 million liras capital as an incorporation and it started to operations in 3 October 1931.

Authorization of issuances of TL would handled by TCMB and this authorization is extended to 1999 in

1955, and in 1994 it increased forever.

1.2. TCMB Duty and Authority

Article 4- (As amended by Law No. 4651 of April 25, 2001)

The primary objective of the Bank shall be to achieve and maintain price stability. The Bank shall

determine on its own discretion the monetary policy that it shall implement and the monetary policy

instruments that it is going to use in order to achieve and maintain price stability.

The Bank shall, provided that it shall not be in confliction with the objective of achieving and

maintaining price stability, support the growth and employment policies of the Government.

1.2.1. The fundamental duties and powers of the Bank

The fundamental duties of the Bank shall be;

to carry out open market operations,

to take necessary measures in order to protect the domestic and international value of Turkish Lira

and to establish the exchange rate regime in determining the parity of Turkish Lira against gold

and foreign currencies jointly with the Government; to execute spot and forward purchase and sale

of foreign exchange and banknotes, foreign exchange swaps and other derivatives transactions in

order to determine the value of Turkish Lira against foreign currencies,

to determine the procedures and conditions of reserve requirements and liquidity requirement by

taking into consideration the liabilities of banks and other financial institutions to be deemed

appropriate by the Bank,

to conduct rediscount and advance transactions,

to manage the gold and foreign exchange reserves of the country,

to regulate the volume and circulation of Turkish Lira, to establish payment, securities transfer and

settlement systems and to set forth regulations to ensure the uninterrupted operation and oversight

of the existing or future systems, to determine the methods and instruments including electronic

environment for payments

to take precautions for enhancing the stability in the financial system and to take regulatory

measures with respect to money and foreign exchange markets,

to monitor the financial markets,

to determine the terms and types of deposits in banks and the terms of participation funds in

special finance houses

1.2.2. Fundamental powers of the Bank

The privilege of issuing banknotes in Turkey shall rest exclusively with the Bank.

The Bank shall determine the inflation target together with the Government and shall in

compliance with the said target adopt the monetary policy. The Bank shall be the ultimate body

authorized and responsible to implement the monetary policy.

The Bank shall, with the objective to achieve and maintain price stability, be authorized to utilize

monetary policy instruments described in this Law and shall also be authorized to directly

determine and implement other monetary policy instruments that it deems appropriate.

The Bank shall, under extraordinary conditions and in cases when the resources of the Fund are

insufficient, be authorized to grant advance to the Savings Deposits Insurance Fund in accordance

with the procedures and conditions that it shall determine.

The Bank shall, as the lender of last resort, carry out the operations of extending credits to banks,

The Bank shall, in accordance with the procedures and conditions that it shall determine, be

authorized to request from banks, the interest rates to be charged in credit operations and deposit –

taking.

The Bank shall, in order to monitor financial markets, be authorized to request necessary

information and to gather statistical information from banks, other financial institutions and from

establishments and institutions authorized to regulate and supervise the said institutions.

1.2.3. Main advisory duties of the Bank

The Bank shall be the financial and economic advisor, the fiscal agent and the treasurer of the

Government. The relation of the Bank with the Government shall be maintained through the Prime

Minister.

The Bank shall present its views to the Government, on the issues to be requested with respect to

financial system.

The Bank may convey its opinions and observations regarding banks and other financial

institutions that it shall deem appropriate to the Prime Ministry and to institutions authorized to

regulate and supervise the said establishments and institutions.

The Bank shall be authorized and empowered to set forth and implement regulations pertaining to

the duties and powers entrusted to it by this Law and legislation, and shall be authorized and

empowered to supervise the compliance with these regulations and the accuracy of the information

submitted at these establishments and institutions subject to the said regulations.

The Bank shall enjoy absolute autonomy in exercising the powers and carrying out the duties

granted by this Law under its own responsibility.

The Bank shall participate to the bankrupt’s estate as a privileged creditor for the amount of its

claims and the interest pertaining to them, in the event of bankruptcy of the bank, person or

institution with whom the Bank undergoes a transaction during the course of implementing

monetary policy instruments. Actions for damages caused by the personnel of the Bank during the

performance of their duties shall only be filed against the Bank.

The right of recourse of the Bank shall be reserved.

2. TCMB Strategic Plan

2.1. Vision

Independence, powerful organization structure and qualified employees, technological advance and

efficient decision making abilities Central Bank of the Republic of Turkey would be leading Central Bank

in the world.

2.2. Mission

Money market, credit and capital market in the first instance; TCMB provides price stability and

regulations for financial stability, manage FX and Gold reserves of the country, issues banknotes, provide

banknote safety in velocity, set up payment systems and manage them, as a liable for transparent

corporate provide value added to its employees, stakeholders and society.

2.3. Policies

1. Independency

2. Transparency and accountability

3. Credibility

4. Public Welfare

5. Effectuality and effectiveness

2.4. Strategic Areas and Themes

In the bank’s strategic plan, the duties given by law and corporate internal support systems collected in 3

strategic areas. These are named as public, global and corporate also they divided into sub titles in it.

2.4.1. Public Area Themes

1. Price stability

2. Financial stability

3. Payment systems

4. Reserve management

5. Fiscal agency, consultant and treasurer for government

6. Emission policy

7. Banks and financial institutions audit

8. Providing statistical data and publish

9. Contact, transparency and accountability

2.4.2. Global Area Themes

1. Role in the central banks’ network

2. Effectiveness and determinativeness in international platforms

3. Effectiveness in near hood of country

4. Role in entrance of European Union

5. Conformity to international norms

6. Liabilities from international agreements

2.4.3. Corporate Area Themes

1. Leadership, governance and strategic planning

2. Quality management system

3. Organization structure

4. Human Resources and education processes

5. Technologic infrastructure and informatics systems

6. Corporate internal communication

7. Construction, logistics and external support services

8. Public relation, demonstrations and activities on external areas of the bank

9. Internal Control System

10. Audit

11. Legal structure

12. Information and documentary management

13. Corporate continuity and security

14. Accounting and budgeting

15. Services in branches

3. Swot Analysis of Central Bank of the Republic of Turkey

Strenghts- EFT- Technology compliance- Strategic location for supreme courts and other decision making mechanisms- Strong banking sector in the country

Weaknesses-Cumbersome structure- Employee saturninity- Veteran employees opposition to change

Opportunities

-New system to determining liquidity by using reserve requirements- Benefit from strong political authority- Stand clear of 2009 financial crisis

Threats- In strategic alteration, thus uncertainity obstruct decision making process.-By using overnight rates, The Central Bank sets the liquidity level this also causes an uncertainity in the economy

4. Income Statement Analysis

As of 2011 As of 2010Weights (%)

Change between the years 2010-2011 (%)

1) Interest Income 5.092.633,004.724.633,00

1,233062

7,788965

Haricteki muhabir hesaplarindan alinan faizler 958.664,00 838.113,000,232118

14,38362

Interest income gained from open market operations 3.568.480,002.970.925,00

0,864024

20,11343

Interest incomes gained from external credits 5.691,00 5.579,000,001378

2,007528

Differences arising from valuation for us 522.767,00 904.250,000,126576 -42,1878

Other Interes income 10.031,00 5.766,000,002429

73,96809

2)interest expense 962.563,002.864.321,00

0,233062 -66,3947

interest expenses paid for credit noted foreign currency (Kredi mektuplu doviz mevduat faizleri) 503.849,00 430.859,00

0,121995

16,94058

interest expenses paid to open market operations 24,001.174.799,00 5,81E-06 -99,998

Interbank operations interest expenses 3.037,00 452.620,000,000735 -99,329

Interest expenses paid to deposits 1.035,00 798.855,000,000251 -99,8704

Interest expenses paid to Treasury 116.883,00 14,00 0,0283834778,6

Differences arising from valuation against us 326.131,000,078965

Other Interest expenses 11.604,00 7.174,00 0,0028161,75077

3)Net income/(expense) from financial assets(1-2) 4.130.070,001.860.312,00 1

122,0095

4)Net fee and commission income 116.041,00 72.945,000,028097

59,08013

Fee and commission income 129.388,00 83.416,000,031328

55,11173

Fee and commission expense 13.347,00 10.471,000,003232

27,46634

5)Non-Interest Income 7.685.124,001.119.471,00

1,860773 586,496

Portfolio profit 0

Foreign exchance profits 7.247.224,001.096.429,00

1,754746

560,9843

Security Valuation 364.620,000,088284

Non-Interest Incomes 73.280,00 22.986,000,017743

218,8027

6)Non-Interest Expenses 1.917.561,001.542.454,00

0,464293

24,31885

Portfolio losses 532.163,00 186.363,00 0,12885 185,551

1 9Foreign exchange losses 167.681,00 373.657,00 0,0406 -55,1244Security losses 304.184,00 0 -100

Personnel expenses 438.138,00 431.114,000,106085

1,629267

Provisions 545.529,00 80.723,000,132087

575,8037

Amortisation expenses 18.555,00 16.899,000,004493

9,799396

Other Non-Interest Expenses 170.495,00 149.514,000,041281 14,0328

8)Profit before income tax (3+4+5+6)10.013.674,00

1.510.218,00

2,424577

563,0615

9)Income tax expense 1.448.474,00 222.089,000,350714

552,2043

0

10)Profit for the year (8-9) 8.565.200,001.288.129,00

2,073863

564,9334

5. Balance Sheet Analysis

ASSETS As of 31.12.2011As of 31.12.2010

Total Weight (%)

Change between the years 2010-2011 (%)

GOLD 18.981.412,00 8.361.219,007,207854 127,0173

International Standard (FX) 18.667.555,00 8.138.467,00

7,088672 129,3743

Non-International Standard (TRY) 303.857,00 222.752,00

0,115384 36,41045

FOREIGN EXCHANGE 148.199.669,00 124.794.215,00

56,27619 18,75524

Foreign Banknotes 455.132,00 461.465,000,172828 -1,37237

Correspondent Accounts 147.415.008,00 124.062.823,00

55,97823 18,82287

Reserve Tranche Position 329.529,00 269.927,00

0,125133 22,08078

COINS 79.451,00 104.946,00 0,03017 -24,2934DOMESTIC CORRESPONDENTS 1617672

0,614282

SECURITIES PORTFOLIO 47379034 20022980

17,99135 136,6233

Government Domestic Debt Instruments 47.379.034,00 20.022.980,00

17,99135 136,6233

Bonds 38.976.099,00 13.572.419,0014,80048 187,1714

Treasury Bills 8.582.935,00 6.450.561,003,259217 33,05719

Other 0DOMESTIC CREDITS 3.023.163,00 689.345,00

1,147992 338,5559

Banking Sector 3.023.163,00 689.345,001,147992 338,5559

Rediscount 3.023.163,00 689.345,001,147992 338,5559

As Per Art 40/1-c of Law No:1211 0Other 0Credits to SDIF 0OPEN MARKET OPERATIONS 39.644.657,00 12.014.961,00

15,05435 229,9608

Repurchase Agreements 39.644.657,00 12.014.961,00

15,05435 229,9608

Cash 39.644.657,00 12.014.961,0015,05435 229,9608

Foreign Exchange 0

Securities 39.644.657,00 12.014.961,0015,05435 229,9608

Securities 0Other 0

FOREIGN CREDITS 29.535,00 29.299,000,011215 0,805488

SHARE PARTICIPATIONS 48.174,00 39.446,00

0,018293 22,12645

FIXED ASSETS 270.610,00 281.319,000,102759 -3,80671

CLAIMS UNDER LEGAL PROCEEDINGS 0TREASURY LIABILITIES DUE TO SDR ALLOCATION 3.310.425,00

2.564.228,00 1,25707529,10026

REVALUATION ACCOUNT 0INTEREST AND INCOME ACCRUALS 75.438,00 26.659,00

0,028646 182,9739

MISCELLANEOUS RECEIVABLES 820.318,00 367.842,00

0,311501 123,0082

OTHER ASSETS 43.918,00 41.844,000,016677 4,9565050

T O T A L 263.343.476,00 169.338.303,00 100 55,513240

CURRENCY ISSUED 55.103.174,00 48.937.560,0020,92445 12,59894

LIABILITIES TO TREASURY 405.122,00 368.215,00

0,153838 10,02322

Gold (TRY) 33.043,00 24.224,000,012547 36,40604

Reserve Tranche Facility (1) 329.529,00 269.927,00

0,125133 22,08078

Other (Net) 42.550,00 74.064,000,016158 -42,5497

FOREIGN CORRESPONDENTS 1.388,00 21.280,00

0,000527 -93,4774

TOTAL DEPOSIT 128.093.771,00 89.269.411,0048,64133 43,49122

1)Public Sector 18.334.749,00 14.881.043,006,962295 23,20876

1a) Hazine genel ve ozel butceli idareler 18.247.523,00 14.708.274,00

6,929172 24,06298

1b) Public institutions 10,00 21,00 3,8E-06 -52,3811c) Iktisadi devlet tesekkulleri 45.290,00 44.143,00

0,017198 2,598373

1d) other 41.926,00 128.605,000,015921 -67,3994

Banking Sector 91.294.778,00 56.150.507,0034,66757 62,58941

Free Deposit of Domestic Banks 40.663.144,00 34.636.803,00

15,44111 17,39866

Foreign Banks 7.645,00 7.975,000,002903 -4,13793

Required Reserves (Central Bank's Law, Art.40) 50.632.765,00 21.505.485,00

19,22689 135,4412

Other 224 244,00 8,51E-05 -8,19672Miscellaneous 17.424.600,00 17.589.614,00 6,61668 -0,93813

2Foreign Exchange Deposits by Citizens Abroad 17.366.530,00 17.539.030,00

6,594631 -0,98352

Other 58.070,00 50.584,000,022051 14,79915

International Institutions 8.935,00 6.687,00

0,003393 33,61747

Extrabudgetary Funds 1.030.709,00 641.560,000,391393 60,65668

Saving Deposits Insurance Fund 5,00 25,00 1,9E-06 -80

Other 1.030.704,00 641.535,000,391392 60,66216

LIQUIDITY BILLS 0OPEN MARKET OPERATIONS 40.078.502,00 13.101.902,00 15,2191 205,8983Repurchase Agreements 39.562.502,00 12.000.002,00

15,02316 229,6875

Cash 0Foreign Exchange 0Securities 0

Securities 39.562.502,00 12.000.002,0015,02316 229,6875

Other 516.000,00 1.101.900,000,195942 -53,1718

FOREIGN CREDITS (FX) 16.826,00 13.899,00

0,006389 21,05907

COLLATERALS & DEPOSITS AGAINST L/C ON IMPORTS 945.855,00 747.358,00

0,359172 26,55983

NOTES & REMITTANCES PAYABLE 1.086,00 3.293,00

0,000412 -67,021

SDR ALLOCATION 3.130.425,00 2.564.228,001,188723 22,0806

CAPITAL (2) 46.234,00 46.234,000,017557 0

1) Paid Capital 25,00 25,00 9,49E-06 02) Capital-Inflation correction differences 46.209,00 46.209,00

0,017547 0

Reserve Fund 5.016.154,00 4.588.399,001,904795 9,322533

1) Adi ve Fevkalade 4.655.509,00 4.232.648,001,767847 9,99046

2) Particular (Hususi) 7.273,00 2.379,000,002762 205,7167

RESERVE FUNDS (2) 353.372,00 353.372,000,134187 0

PROVISIONS 1.612.923,00 371.154,000,612479 334,5697

REVALUATION ACCOUNT 19.498.213,00 7.245.849,00 7,4041 169,0949INTEREST AND EXPENSE

567.747,00 628.421,00 0,215592

-9,65499

ACCRUALS (1)MISCELLANEOUS PAYABLES 42.973,00 32.748,00

0,016318 31,22328

OTHER LIABILITIES 226.883,00 110.223,00

0,086155 105,84

Net Profit 8.565.200,00 1.288.129,003,252482 564,93340

Total Liabilities 263.343.476,00 169.338.303,00 100 55,51324

6. Related Ratios

I. Earnings and Efficiency Profitability Ratios As of 2011:1 Return on Asset (ROA)

Net Income / Total Average Assets 0,0325248233 Income Expense Ratio

Total Income / Total Expense 4,4365301634 Avarage Return of Interest Earning Assets

Total Interest Income / Total Average Interest Earning Assets 1,3661420175 Avarage Cost of Funds

Total Interest Expense / Total Average Interest Bearing Liablities 0,0203162236 Ratio of Non Interest Income to Non Interest Expense

Non Interest Income / Non Interest Expense 4,0077598577 Break-Even Ratio

(Total Expenses - Non Interest Income) / Total Average Interest Earning Assets -1,589394948

8 Ratio of Net Interest Income to Avarage Total AssetsNet Interest Income / Total Average Assets 0,087170836

9 Ratio of Total Operating Expenses to Total Income(Total Operating Expense / Total Operating Income) 0,249515948

10 Ratio of Interest Expense to Interest IncomeInterest Expense / Interest Income 0,233062151

11 Percantage of Non-Interest Income in Total Income(Non-Interest Income / Total Income) 0,650444165

12 Operating Expenses required to Manage Assets(Operating Expense / Total Average Assets) 0,007281597

13 Interest Profitability of Interest Earning AssetsNet Interest Income / Average Total Interest Earning Assets 0,081942261

15 Efficiency RatiosNon Interest Expense /( Interest Income - Interest Expense + Non Interest Income) 0,650444165

III. Liquidity Ratios27 Deposit to Loan Ratio 92,39

Total Loans / Total Deposits29 Ratio of Foreign Currency Assets to Foreign Currency Liabilities

Foreign Currency Assets / Foreign Currency Liabilities 106772,0958Ratio of Interest Earning Assets to Total Assets

33 Interest Earning Assets / Total AssetsRatio of Contingent Liabilites and Commitments 0,011592078Total Contingent Liabilites and Commitments / Total AssetsPercentage of Non-Performing Loans in Total Loans 0,011479924

40 Loan Concentration Risk RatioTotal Big Loans / Total Loans 0,001027593

7. PROJECT PAPER INTERVIEW EVALUATION FORM

NAME OF BANK: TCMB NAME OF STUDENT: Emre Günbeyi & Ahmet Balcı

I. To be completed by student:

1. How effective was your interview?5ٱExcellent

2. How do you rate the quality of the answers given to your questions?5ٱExcellent

3. If this bank offered you a job, would you want this bank personnel to be your manager?5ٱDefinitely

II. To be completed by bank manager:

1. How effective was your interview?5

ٱExcellent

2. How do you rate the quality of the questions asked to you?

5ٱExcellent

3. If this individual applied to you for a job in your bank, would you want to work with him/her?

5ٱDefinitely

DATE: 26.02.2012NAME OF BANK MANAGER: Central Bank Of Republic Of Turkey Market General Directorate, Fx Market Manager, Bulent Usta

Note:All elements used in this paper are from student works and critiques about the bank can not be associated with Mr. Usta

8. Conclusion

With the help of the technology compliance, benefiting from strong banking sector in the country

and high credibility of the government TCMB has opportunity to increase its value and show its potential

in practice. Despite using new implementations causes a uncertainty for the banks’ decision making

process, TCMB has a great credibility from the side of supreme authority and the whole economy.

However, cumbersome structure can be covered as weakness in the way of its significant

implementations.

TCMB is a non-profit organization which gives services to whole economy, but though it has

increased its net income by %122 between the years 2010-2011, and for this reason its profits rose by

%564. Also as of 2011 it has increased its total assets by %55 percent, for this reason it has a ROE of %3

and income expense ratio of 4.43 as mentioned above. Also it has a low cost of funding (%2) which makes

it more profitable

Besides of its financial position, it has increased its reserves by %135, which makes it a very

strong bank against a market risk.

9. References

TCMB Operation Reporthttp://www.tcmb.gov.tr/ Access Date: 01/05/12

History of TCMBhttp://www.tcmb.gov.tr/yeni/banka/tarihce.html Access Date: 30/04/12

Balance Sheet of TCMBhttp://evds.tcmb.gov.tr/yeni/cbt-uk.html Access Date: 24/02/12

Income Statement of TCMBhttp://www.tcmb.gov.tr/yeni/mgm/denetim2011/2011audit.pdf Access Date: 24/02/12