ISTANBUL BLOG: Banking regulation as clear as dishwater

ISTANBUL BLOG: Banking regulation as clear as dishwater
Will Turkey's loan growth double the 2017 growth that ended in the August 2018 currency crash?
By Akin Nazli in Belgrade June 22, 2020

Turkey’s central bank has suspended a reserve requirement for banks until the end of 2020 in order to further boost credit flows, Erdogan loyalist media title Daily Sabah reported on June 22.

Previously, the regulator was requiring that lenders with a real annual loan growth rate above 15% kept their adjusted real loan growth rate below 15% to benefit from reserve requirement incentives.

Puzzled? Not to worry. Except for the banks’ treasury departments, no one truly follows up on each regulatory shower anymore, as it’s just not possible. Indeed, in an end of May article on how private lender shareholders feel their banks are getting a raw deal from the Turkish government, Reuters quoted a senior bank executive as saying:  “You can’t have changes in the regulatory framework every week. This has become too common and has to settle down.”

Amendments to amendments

Even the different regulatory bodies in Turkey do not closely follow up on each other’s new regulations and amendments to existing regulations, not forgetting the amendments to amendments. It is not uncommon, however, to see regulatory bodies employing amendments to their own regulations to comply with amendments made by other regulatory bodies to already amended regulations.

The central bank, the BDDK banking watchdog, the SPK capital markets board and the trade ministry separately issue new regulations along with amendments to existing regulations with an impact on banking.

The BDDK has employed a proactive perspective in introducing around 50 regulations since the beginning of the coronavirus (COVID-19) outbreak, Mehmet Ali Akben, head of the regulator, said on June 14.

His figure does not include regulations and regulatory amendments introduced by other authorities, while the overall list of regulatory forbearance instances since 2016 would deserve a PHD thesis.

The overriding idea in the latest tweak to reserves regulation is that the central bank—as ever driven by the Erdogan administration’s passion for pumping more and more credit into Turkey’s flailing economy, a strategy now redoubled given the unhelpful arrival of COVID-19—wants more loan growth when it comes to both individuals and firms.

Seker Invest attempted to explain the latest central bank ruling in its daily bulletin: “Recall that the CBRT [Central Bank of the Republic of Turkey] allows banks that provide higher loan growth to keep a lower reserve requirement ratio, as well as offering them a higher renumeration rate. In order to earn that right, the CBRT demands banks display real loan growth of above 15%, but in order to encourage commercial loans (with two-year and longer maturities) and housing loans (with five-year and longer maturities), it also demands adjusted loan growth, which excludes commercial and housing loans (with specified maturities), is below 15%. It seems that the CBRT has now lifted the adjusted loan growth rate standard (to below 15%) to be eligible for the lower required reserve and higher renumeration rate incentive.”

Seker went on: “Accordingly, banks (basically the state banks) will now have greater leeway to release personal loans, in addition to commercial and housing loans.”

Other media reports also suggest that the ruling is aimed at providing lenders with the required further space to provide more consumer loans.

Policy tool

The central bank has used the reserve requirement ratios and remuneration rates on the required reserves as a policy tool for a long time, BloombergHT noted.

Last August, the central bank introduced a new reserve requirement rule to provide lenders, with nominal loan growth in a corridor of 10-20%, with the benefit of lower reserve requirement ratios and higher remuneration rates.

Later on, the corridor was redefined as real loan growth of 5-15% after inflation remained high.

Since the end of 2019, the corridor has included exceptions for some specified sector loans along with long-term commercial and mortgage loans.

The latest ruling scrapping the corridor until the end of this year has eliminated the inconsistency between the BDDK’s asset ratio, which aims to boost lending, and the central bank’s reserve requirement policy, Ibrahim Unalan of TED University told BloombergHT.

Enver Erkan of Tera Invest and Omer Emec of Albaraka Turk made the same point.