Central Bank and Bank Regulator try to change the currency game20 April 2020
BRSA announced a new ratio for the banks at the weekend while CBRT Governor Murat Uysal held an interview with Anadolu Agency.
Important notes from the interview are as follows:
– The CBRT considers that the risks on inflation forecast are on the downside to the fact that commodity prices and aggregate demand conditions limit inflation despite the exchange rate developments. With a similar evaluation, we also reduced our year-end inflation expectations from 10.5% to 8.0%. However, since the CBRT’s year-end inflation expectation is 8.2%, we can see that the Bank’s inflation forecast is below .8.0% in the Inflation Report to be published at the end of April.
– The CBRT Governor stated that the steps implemented to support the monetary transmission mechanism are timely, target-oriented and predictable, so they do not pose a significant risk for the falling path in inflation. However, we think that the bond buying program implemented during the epidemic period and the non-sterilization of liquidity expansion with appropriate policies after the outbreak may cause high inflation to come back rapidly with growth and the struggle against inflation to be difficult.
– Mr. Uysal also stated that negotiations were held with central banks to strengthen current cooperation and establish new swap agreements. The realization of these agreements, especially a swap agreement with the Fed, would bring relief in financial markets and help prevent a sudden dollar liquidity congestion.
In addition, the BRSA announced that the banks will need to meet a new asset ratio according to the formula below, starting May 1. According to the decision taken, this rate will not fall below 100% on average in deposit banks and below 80% in participation banks. According to the formula, the FX deposit increase will decrease the asset ratio with a factor of 1.25, which is a deterrent for banks’ FX deposits. On the other hand, the fact that the securities multiplier in the denominator is 0.75 and the swap multiplier is 0.5 indicates that the highest weight is in loans to meet the ratio.
Asset Ratio (AR): [Loans + (Securities x 0.75) + (Swap with CBRT x 0.50)] / [TRY Deposits + (FX Deposits x 1.25)]
In order not to lower the ratio below 1.0, deposit banks will need to give consumer or corporate loans, buy domestic debt instruments including Eurobond and lease certificates issued by the Treasury as well as private sector bonds and bills, or make swap with the CBRT. If the loans turn out to be non-performing, it will be necessary to give more loans, hold more securities or make more swaps to get the ratio.
Asset Ratio by Bank Groups
We cannot see the data for TL equivalent of the foreign currency given as a swap to the CBRT according to the bank distinction, but when we distribute the swap stock according to size of the foreign currency deposits, we see that the asset ratio is above 1.0 for public banks but below 1.0 for private and participation banks.
The BRSA’s measures will direct the banks to the operation of credit mechanism, but should the loans that are on the verge of non-performing due to the coronavirus outbreak actually enter into NPL, the credit system will be squeezed due to the need for providing more loans to meet the ratio condition.
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