According to the CBRT Law, one of the fundamental duties of the Bank is “to take precautions for the enhancement of the stability in the financial system and to take regulatory measures with respect to money and foreign exchange markets”.
Moreover, monitoring financial markets, advising to the government on issues about the financial system, determining the procedures and conditions of reserve requirements and liquidity requirement by taking into account the liabilities of banks and other financial institutions, determining the types and maturities of deposits accepted by banks; establishing, managing and supervising payment and settlement systems are among other fundamental duties of the CBRT related to financial stability.
At the monthly Monetary Policy Committee meetings, developments in financial systems and the measures that can be taken against them are discussed and various macroprudential policy steps are taken to support financial stability, if deemed necessary.
Under extraordinary circumstances and in cases where the resources of the Savings Deposit Insurance Fund (Fund) are insufficient, the CBRT may grant advances to the Fund, extend credit to banks as the lender of last resort, request necessary information and gather statistical information from banks, other financial institutions and other authorities.
For Turkey, 1990s was a period marked by high inflation, volatile growth and financial crises. In this period, the CBRT mainly focused on restricting exchange rate fluctuations and ensuring stability in financial markets.
However, failure in overcoming structural problems and restoring confidence in financial markets led to the deepest financial crisis of Turkey in February 2001. The Turkish lira significantly depreciated, interest rates reached historic highs, payment and settlement systems came to a halt due to banks’ inability to fulfill their liabilities and many bankruptcies occurred during and after the crisis. In this period when financial stability was severely damaged, the financial system could only be kept functioning with significant capital support from the government.
In order to put the economy back on track of sustainable growth, fiscal deficits were reduced, fiscal dominance was eased and new regulations and structural reforms were introduced to increase the banking sector’s resilience against internal and external shocks, to ensure that it remained competitive on an international scale and focused on its intermediation function.
Meanwhile, the amendment made to the CBRT Law in April 2001 made price stability the Bank’s primary objective and financial stability an auxiliary objective.
Thanks to the structural reforms introduced and implemented decisively and the stabilization of the Turkish economy in general, the financial system gained strength, increased its profitability and contributed to the strong growth performance of the economy.
Global financial crisis of 2008 was an important test for the resilience of both the Turkish banking sector and the overall economy. With the help of its sound financial situation, impact of the global crisis on the Turkish economy remained limited and in the aftermath of the crisis, Turkey received strong short-term capital inflows. This led to increased consumption due to easier access to credit while the Turkish lira appreciated and current account deficit widened. Consequently, these developments fuelled concerns over financial stability and called for an alternative policy approach. Hence, the CBRT intensified its financial stability-oriented communication, thereby giving the first signals of its policy change.
In this context, in order to constrain the macro financial risks, the CBRT redesigned its inflation targeting regime in a way that would enable different but complementary policy instruments to be implemented concurrently. First, the spread between overnight lending and borrowing rates of the CBRT (interest rate corridor) was widened. This paved the way for an operational framework, which made it possible to adjust the volatility of the short term money market rates according to the conjuncture. The objective of this framework is to discourage short term capital inflows by reducing the average yield of short term rates and increasing their volatility.
In addition to the interest rate corridor, reserve requirement ratios were put into use as a macroprudential instrument to control Turkish lira liquidity and credit supply. To this end, interest payments to required reserve balances were discontinued, weighted average of reserve ratios was raised and the list of liability items to be considered in the calculation of reserve requirements was expanded. Moreover, in order to support financial stability by extending the maturity of banking sector liabilities, reserve requirement ratios were differentiated for different maturity brackets by making reserve ratios higher for short term liabilities.
Besides, in order to support cost and liquidity conditions of the banking system and to provide it more flexibility in its liquidity management, the Reserve Options Mechanism was added. Thus banks were allowed to hold foreign exchange or gold reserves to satisfy part of their Turkish lira reserve requirements and to hold gold reserves to satisfy part of their foreign exchange reserve requirements.
With these initiatives, in the framework of its primary objective of price stability, the CBRT has shifted towards a flexible monetary policy, which closely monitors financial stability.
Reserve Requirement Ratios
BDDK (Banking Regulation and Supervision Agency)
The FSB has been established to coordinate the work of national financial authorities and international standard setting bodies at the international level and to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies in the interest of financial stability.
Turkey became a member of the FSB in March 2009, and has been represented by the Central Bank of the Republic of Turkey at the FSB Plenary. In 2015, during the review of structure of FSB’s representation, Turkey was granted an additional seat at the FSB Plenary. Since March 2015, Turkey has been represented at the FSB Plenary together by the Central Bank of the Republic of Turkey and the Undersecretariat of Treasury. The other related authorities in Turkey also contribute to the work carried out by the FSB.
In addition to its seat at the FSB Plenary, the CBRT is actively involved in the work of the FSB’s standing committees, namely the Standing Committee on Standards Implementation and the Standing Committee on Assessing Vulnerabilities, as well as several working groups. The Central Bank is also the co-chair of the Middle East and North Africa (MENA) Regional Consultative Group, and within the framework of MENA co-chairmanship, the CBRT participates in the FSB Steering Committee meetings.
Membership base of the BCBS was expanded following the global financial crisis in order to increase international cooperation and coordination in bank supervision. With this expansion, along with the supervisory authorities of a number of other emerging economies, the Banking Regulation and Supervision Agency of Turkey became a member of the BCBS on 25 May 2009, and the CBRT followed suit on 1 July 2009. The CBRT attends several working groups of the BCBS and contributes to policy development process taking the situation of the Turkish banking sector into account.
17th of the International Conference of Banking Supervisors, which is organized by the BCBS to enhance communication between national authorities, was held in Istanbul in 2012 with the CBRT and the BRSA co-hosting the event.
Financial Sector Assessment Program (FSAP) is carried out with the cooperation of the IMF and the World Bank. The FSAP is a project that aims to create policy responses by assessing the risks and vulnerabilities of the financial sector. The FSAPs on Turkey were carried out in 2007 and 2011.
Turkey is a founding member of the OECD, and the CBRT participates in the work of the OECD. Representatives of the CBRT attend the meetings of the Financial Markets Committee. In these meetings, the global financial developments are discussed, international cooperation is enhanced by sharing countries’ experiences and improvement of coordination in policy implementation is sought. Furthermore, the CBRT is a member of International Network on Financial Education (INFE) and participates in the works of the several sub-committees.
The IFSB, which was started operations in 2003, aims to promote the development of a prudent and transparent Islamic financial services industry through introducing new, or adapting existing international standards consistent with Islamic principles, provide guidance on effective supervision of institutions offering Islamic financial services and develop criteria on identification, measurement and management of risks in the sector.
The Central Bank became a full member in 2013, together with the related authorities in Turkey. The CBRT participates in the General Assembly and the several working groups under the IFSB.
The IILM, which was established in 2010, aims to create and issue financial instruments that are in compliance with Islamic principles to facilitate cross-border Islamic liquidity management for institutions offering Islamic financial services.
The Central Bank is among the shareholders of the IILM, and participates in the General Assembly, Governing Board, Board Executive Committee, as well as Audit Committee and Risk Management Committee.