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Legal Alerts

11/08/2016

Turkish Central Bank to Provide Extra Market Liquidity through Reserve Ratio Adjustments

Legal Alerts
Banking & Finance
General

Recent development

Seeking to ensure that the market has sufficient available liquidity following the recent political and economic developments in Turkey, the Central Bank of Turkey (the “Central Bank“) reduced the Turkish banks’ reserve requirements for Turkish lira liabilities on August 10, 2016. The changes will take effect on August 12, 2016.

New TRY reserve requirements

The Central Bank has reduced the reserve requirement ratios for banks’ Turkish Lira (“TRY“) liabilities by 50 basis points for each maturity bracket:

MaturityNew RatiosPrevious Ratios
 

Core Liabilities (excluding deposits outside of Turkey)

Three months or less11%11.5%
Six months or less8%8.5%
Less than one year6%6.5%
One year or more7%7%
 

Borrower Funds of Investment and Development Banks

All11%11.5%
 

Non-Core Liabilities (including deposits outside of Turkey)

One year or less11%11.5%
Three years or less7.5%8%
More than three years4.5%5%

 

Since 2011, the Central Bank is applying an “optional reserve mechanism” that allows banks to hold certain portions of their TRY required reserves in USD and/or gold reserves (currently up to 60% for USD and 30% for gold). The amount of USD/gold corresponding to one TRY is determined though the reserve option coefficient (“ROC“), which is applied gradually depending on the ratio of the use of USD and/or gold for TRY reserves. Accordingly, if the ROC is determined to be 1.5, the banks must hold USD and/or gold equal to 1.5 TRY for one TRY in their required reserves. The Central Bank increased the ROC for certain brackets, as shown below:

Banks’ USD or Gold Held for TRY reserves (%)New ROCPrevious ROC
 

USD

30% to 35%1.61.5
35% to 40%2.01.9
40% to 45%2.42.3
 

Gold

Up to 15%1.51.4
15% to 20%1.61.5

 

Conclusion

Following in the wake of recent political developments, the Central Bank has promptly responded to these developments by providing unlimited liquidity to banks. The Central Bank now uses its innovative policy tools to enhance liquidity in the market by decreasing the TRY reserve requirements. The Central Bank estimates that approximately TRY 1.1 billion and USD 600 million will be provided to the financial markets, assuming that the reserve options are exercised at their current levels. Furthermore, the optional reserve mechanism continues to provide flexibility for Turkish banks to adjust their TRY and FX reserves endogenously and in accordance with their liquidity needs.

Please contact us if you have questions about how these changes might affect your company.