UPDATE - Turkish Central Bank revises reserve requirement

UPDATES WITH COMMENTS FROM ECONOMIST AND HEAD OF CENTRAL BANK

By Gokhan Ergocun

ISTANBUL (AA) - The Central Bank of the Republic of Turkey (CBRT) on Friday revised its regulations on reserve requirements to improve the effectiveness of the monetary transmission mechanism in the country.

In line with its main objective of price stability through monetary tightening, the bank decided to simplify its reserve requirement regulations, it underlined in a written statement.

The CBRT said it had thus decided to apply the same reserve requirement ratios and remuneration rates to all banks, while also overturning the earlier practice of linking reserve requirement ratios and remuneration rates to real loan growth rates.

With the decision, the remuneration rate for all banks' Turkish lira-denominated required reserves will be 12%.

It also decreased the commission rate applied to reserve requirements maintained against US dollar-denominated deposit/participation fund liabilities to 0% from 1.25%.

The bank also changed reserve requirement ratios for Turkish lira and foreign exchange (FX) deposits.

On the Turkish lira side, it raised reserve requirement rates to 6% -- from the previous 4% -- for demand and one to three-month notice deposits.

For notice deposits of up to six months, reserve requirements will be at 4%, while they will be at 2% for notice deposits of up to a year and 1% for those over one year.

For borrower funds of investment banks, the rate will be 6% -- up from 4% -- for notice deposits of up to a year, 3.5%, 1% for those up to three years and 1% for those longer than three years.

Meanwhile, the reserve requirement rate will be 19% for demand and one to six-month notice FX deposits and 13% for such deposits with notice intervals longer than one year.

Precious metal deposits accounts' reserve requirement rates were raised to 22% from 17% for demand and notice deposits of up to one year and to 18% from the previous 13% for those longer than a year.

For borrower FX funds of investment banks, rates will be 21% for notice deposits of up to one year, 16% for those up to two years, 11% for up to three years, 7% for up to five years and 5% for longer.

"As a result of these changes, required reserves of the banking system is expected to increase by approximately 12.3 billion Turkish liras [$1.57 billion] and $5.7 billion in FX and gold, should the reserve option utilization rates remain unchanged," the bank noted.

"On the other hand, intermediation costs will decrease as a result of the changes in remuneration and commission rates," it added.

Changes in remuneration and commission rates will be effective starting Friday, and other regulations -- both in Turkish lira and FX reserve requirement ratios -- will go into operation in December.

- Economic fallout of pandemic

Central Bank Governor Naci Agbal said in the first quarter as a result of the pandemic, the growth outlook in Turkey and the world was significantly weakened. Therefore expansive fiscal and monetary policies have been implemented to eliminate the negative impacts, he added.

In Turkey, the recovery process started this summer, he said in the bank's financial stability report.

The dollarization trend was high and the current account deficit increased due to a rapid rise in credits, strengthened domestic demand and gold imports, he added.

This situation puts pressure on exchange rates and FX reserves, increasing risks to price stability and macro-financial stability, he added.

"Within the framework of the goals of maintaining financial stability and strengthening the financial system, domestic and global developments and risk factors will be followed closely with a holistic approach," he underlined.

Agbal also said the bank will take care of the development and effective operations of financial markets, implement coordinated and effective policies with the stakeholders to prevent macro-financial fragility and to reduce existing fragilities.

- New normal

Enver Erkan, an economist at Istanbul-based private investment firm Tera Yatirim, said economy decision makers are carrying out a new normalization step almost every day and meeting the expectations of the market.

Citing the bank's new regulation, he said: "In the process that started with the simplification of the monetary policy of the Central Bank, in a way to strengthen the perception of the new period in the economy, we see that the decisions that will support the 'normalization' perception are taken one by one."

He recalled that the previous day, the Turkish banking watchdog eliminated the asset ratio applied for banks as of the end of the year.

Required reserve is the money that banks must keep in Central Bank accounts in local currency and FX, the Central Bank pays a certain amount of interest to these required reserves, and this is known as remuneration, he noted.

He also said that in the previous period, when credit growth was encouraged, the Central Bank diversified interest rates on required reserves and conditioned the interest payments on "real loan growth".

"Banks that met the requirement for real loan growth were able to receive more interest payments by holding less required reserve, there was also a disadvantageous position for banks that did not meet the requirement for credit growth," he underlined.

He added: "Most importantly, the interests paid to reserve requirements will no longer be dependent on the condition of 'real credit growth'. Banks' hands were relieved in terms of balance sheet management with the abolition of regulations that forced them to lend more.

"In addition, by increasing reserve requirement rates, banks that previously held less reserve requirement will keep more Turkish lira and FX in Central Bank accounts."