Turkey Central Bank Unveils New Tool to Limit Bank Debt Risk

Turkey’s central bank announced a new policy tool today to limit risks of excessive debt in the banking system by placing higher reserve requirements on banks that fail to meet specified leverage ratios.

The bank will begin relying on a new leverage ratio together with the capital adequacy ratio to guard against an expansion in debt, central bank Governor Erdem Basci said at a press conference in Ankara today. The measure will require banks with leverage levels below 3.5 percent to hold additional reserve requirements that will increase as the leverage ratio decreases.

The leverage ratio is a measure of a bank’s equity divided by its liabilities plus off-balance sheet items, the central bank said in a report on its website today. Banks with a leverage ratio of less than 3.5 percent will be subject to additional reserve requirements of as much as two percentage points starting in 2014, Basci said.

The move shows the bank’s determination in preventing systemic risk in the banking system and will have little impact because banks are not excessively leveraged, according to Emre Tekmen, an Istanbul-based economist at Turk Ekonomi Bankasi, BNP Paribas SA’s Turkish unit.

Signaling Effect

“It has some signaling effect,” Tekmen said in response to e-mailed questions today. “The market already knows that macro-prudential measures will be more active in 2013.”

Only three banks in Turkey have a leverage ratio below 5 percent, Basci said, and none have a ratio below 3.5 percent. He said that at the end of 2014, the threshold would be increased to 4 percent and by the end of 2015, it would increase to 5 percent. Most banks’ ratios are above 7 percent, he said.

The chances of the new leverage ratio being used are “quite slim,” Cevdet Akcay, chief economist at Yapi & Kredi Bankasi AS, the bank part-owned by Italy’s UniCredit SpA (UCG), said in a phone interview from Istanbul today. “It’s a new policy tool, but it’s not going to be extremely significant.”

These measures are part of a broader global trend in which “macro-prudential measures will be used more,” Aksay said. “In the past, monetary and fiscal policies were applied, now it’s going to be the new tool kit with monetary, fiscal and macro- prudential policies.”

Preventive Measures

The loans-to-deposit ratio among Turkish banks was 104 percent, Banks Association of Turkey General Secretary Ekrem Keskin told reporters in Ankara on Dec. 14. A ratio of above 100 percent means banks rely on foreign funding to finance loan growth.

“In Turkey, when banks expand their assets they do so by increasing indebtedness,” Basci said today. “An excessive risk-taking scenario in which the leverage ratio of many banks would decline rapidly confirms the need to take preventive measures.”

Last year, rapid consumer credit expansion helped widen Turkey’s current-account deficit to about 10 percent of gross domestic product. That contributed to an 18 percent loss in the value of the lira and an inflation rate of 10.5 percent. Basci said today that preventing loan growth from exceeding 15 percent would “support price and financial stability.”

Inflation

The bank will remain committed to inflation targeting, while monitoring the so-called real exchange rate index and credit expansion as key ingredients in price stability, Basci said.

The real exchange rate index measures the lira against the currencies of its main trading partners. A reading of 130 or above would signify “extreme volatility,” Basci said today. Last month, Basci said that a reading above 120 would be cause for concern as it suggested the lira was becoming overvalued. The measure was at 119.2 in November.

The central bank’s new announcement is consistent with a monetary policy stance that will “continue to be characterized by short-term interest rates and tight macro-prudential measures,” Inan Demir, chief economist at Finansbank AS, the Istanbul-based lender owned by National Bank of Greece (TELL), said in an e-mailed report today.

“We foresee domestic demand accelerating in the upcoming period, which would translate into excessive loan growth and external balance deterioration in the absence of policy response,” he said.

To contact the reporter on this story: David Neylan in Ankara at dneylan1@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net

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