Monday, September 27, 2010

Addendum to Hurriyet column, Basel III and Turkey

There were quite a few issues I could not explain as much as I wanted to in my Hurriyet column about the impact of Basel III rules on Turkey, so addendum is in order:

First, I deliberately avoided naming an explicit figure for costs because I would have essentially made it up:)- that is no easy task, and definitely not a few hours' work. But at least, I can walk you through my reasoning:

As I have identified the external financing as the main channel Turkey would get hit through Basel III, I had better explain why I think the external financing outlook is worsening. And as I always say, a picture is always better than a thousand words:
As you can see in this graph, compliments of my friends at Turkey Data Monitor, external financing has shifted from FDI and corporate borrowing to portfolio flows and banks. The former is usually deemed a less trusted source of external financing. And while banks flows are normally a good way to finance the deficit, we could see a pullback in that channel because of Basel III, as Turkish banks are borrowing from global banks.

You could generalize this point to emerging markets in general: While all would be effected by external financing drying up, those dependent on short-term speculative flows and banks would feel the heat the most. With emerging markets getting record flows following the Fed's Quantitative Easing II, this is not an immediate concern, but certainly one we should keep at the back of our heads' in the next couple of years.

Finally, it is worth mentioning that many details on Basel III have yet to be clarified. For example, if hybrids and other exotic stuff will not be qualified as top-notch capital, then the cost on banks will be much higher. In fact, there are already some reports that the costs on banks, especially investment banking divisions, will be significant. And some regulators, such as the Swiss and the British, are already asking their banks to hold capital in excess of the Basel rules

All in all, I would argue that it is too early to ignore Basel III, especially if you are a emerging market like Turkey dependent on bank flows for external deficit.

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