In a statement on the Central bank’s website, it was stated that the reserve option mechanism that allows holding foreign currency will initially be reduced to 10% of TRY reserve requirements and will be terminated on October 1. Changes to required reserves are as follows:
· Required reserve ratios for foreign currency deposits were increased by 200 basis points. The required reserve ratio for FX deposits/participation funds was increased from 19% to 21% up to one year, and from 13% to 15% for those with a one-year or longer maturity.
· TRY and foreign currency reserve requirements are expected to increase by around 13.2 billion TRY and 2.7 billion USD, respectively, at the beginning.
· In order to increase the share of TRY in total deposit/participation funds in the banking system, additional interest will be applied to TRY required reserves. (To ensure FX – TRY deposit rotation)
· Foreign currency deposits/participation funds existing as of 25 June 2021 and converted into TRY deposits/participation funds after this date will be exempted from required reserve liability. (Deposits returning from FX to TRY will not be included in the required reserves.)
According to STS (Special trade system), Turkey’s exports increased by 66.1% to 15.65 billion USD in May 2021 compared to the same period of the previous year, while imports increased by 51.2% to 19.32 billion USD in the same period. The ratio of exports to imports was 81% in the said period.
We anticipated that banks would pay more interest to RRs held in TRY. The aim is to enable banks to hold more deposits in TRY and shift their FX deposit weight to the TRY deposit side. Banks holding more deposits in TRY will enable them to receive more interest payments on the amount they hold in the CBRT RR account. By increasing the FX RRs, the cost of funding the banks’ FX deposits will increase. The increase in banks’ funding costs in foreign currency may cause them to lower the interest rates on FX deposits. However, of course, the fact that the FX – TRY rotation in the deposit weight is in favor of TRY is a situation that is at the disposal of the depositors rather than the banks. The effectiveness of the RR changes, which we see as contributing to de-dollarization, will not be sufficient only on their own. It is important to be able to change the preferences of the depositors to ensure the transition from FX to TRY. This happens with confidence, stability and strong return position in TRY; The depreciation of TRY against inflation and foreign currencies causes no net de-dollarization process.
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