Turkish central bank hikes reserve requirements on forex deposits by lenders

Turkey’s central bank

Turkey’s central bank headquarters is seen in Ankara (file). The bank added that the move would lead to the withdrawal of $4.2bn of forex liquidity from the market.

Turkey’s central bank has raised reserve requirement rates for foreign exchange deposits at commercial banks, extending efforts to discourage locals from converting lira into other currencies. Turks have flocked to foreign currencies since a lira crisis last year, with foreign exchange deposits and funds, including precious metals, held by Turkish individuals and institutions hitting a high of $182bn on May 17. The central bank said yesterday it had raised the reserve requirement ratios for forex deposits and participation funds by 200 basis points for all maturities to support stability.

The bank added that the move would lead to the withdrawal of $4.2bn of forex liquidity from the market. The latest move by the central bank makes it more costly for banks to keep forex deposits, one trader said. “It aims to make it more attractive for banks to collect lira deposits,” the trader said.” As a secondary effect, it is a decision that will increase the central bank’s reserves.” The lira has fallen some 37% since the beginning of 2018. The central bank’s move helped the currency strengthen briefly yesterday. The lira stood at 6.0600 against the dollar at 1010 GMT, having earlier firmed to 6.0370. It was around 6.0635 before the central bank’s announcement.Investors have been concerned about the central bank’s ability to defend the lira in the case of another sharp decline, given its reserves have fallen significantly in recent months.

Ankara has already taken several steps to discourage Turks from turning to forex deposits, such as this month raising a tax on some foreign exchange sales to 0.1%, from zero. The BDDK banking watchdog last week imposed a one-day settlement delay on forex purchases of more than $100,000 by individuals. Credit rating agency Moody’s said yesterday that recent regulations could impact Turkish banks negatively, adding that the increased dollarisation would lower demand for the lira. Forex deposits accounted for 55% of all deposits in the banking sector as of May 17, data on the BDDK’s website showed. “Given the increased concentration of foreign-currency deposits in banks’ funding profiles, the recent regulations are negative for Turkish banks’ credit quality because they weaken depositor confidence, specifically in relation to foreign-exchange deposits,” Moody’s said.

Sources and photo-credits: Gulf Times, Reuters